No full-text available
To read the full-text of this research,
you can request a copy directly from the author.
The term structure of Eurodollar interest rates and its relationship to the US Treasury-bill market
Abstract
This paper examines an efficient market of the term structure of Eurodollar interest rates and its relationship with the US Treasury-bill market. Standard test procedures and Granger causuality tests are conducted which provide evidence showing that past changes in short-term Eurodollar or domestic interest rates are not useful in predicting changes in long-term Eurodollar interest rates. The Eurodollar market appears to be efficiently integrated with the US domestic financial market.
... Provided that the non-stationarity characteristics of the data are taken into account, the rationale for this form of causality testing follows from the above discussion if one addresses Equation 1 directly, rather than manipulating that relationship in terms of the spread. For example, Krol (1987) tests for Granger causality between long and short term Euro-dollar interest rates, and fails to find any such relationship. More recently, Liitkepohl and Reimers (1992) have analysed US data for the period from 1957-90 and concluded that the long term rate was clearly causal for the short term rate and possibly there existed feedback between the two. ...
This study analyses monthly US Treasury short and long term interest rate data over the period 1950-82. We test for Granger causality between the short and long rate series in the context of an appropriately formulated vector autoregression which takes account of the non-stationarity of the data, and possible cointegration between the series. Unlike earlier studies, an allowance is also made for the seasonality of the monthly data, and special attention is paid to the presence of a major structural break in the data. Bootstrap simulation techniques are used to obtain critical values for unit root and cointegration tests which allow for this structural change. We find strong evidence that long rates caused short rates over the sample period, and some evidence of causality in the reverse direction. This supports the expectations theory of the term structure.
We examine the interest rate volatility spillover between the offshore and onshore Renminbi (RMB) markets. The Hong Kong inter-bank RMB offer rate (CNY HIBOR) and the Shanghai inter-bank offer rate (SHIBOR) are used, respectively, as the interest rates for the offshore and onshore RMB markets. The results of our research show that there was significant volatility spillover between the offshore and onshore RMB prior to 21 June 2013 and that direction of the spillover from the SHIBOR to the CNY HIBOR is stronger than that from CNY HIBOR to SHIBOR. However, the spillover declined in strength between 21 June 2013 and 20 April 2016. We also find that the interest rate correlations are low and unstable. Our research reveals that the offshore RMB interest rate has been an independent system that is not determined by the onshore market, and that the determination of the offshore RMB interest rate is very complicated. The Hong Kong market is increasingly playing a more important role in the determination of the RMB. This study contributes to our understanding of the interest rate determination in China and has important implications for policy makers in terms of interest rate policies in the offshore and onshore RMB markets.
In this paper, we examine the periods before and after the stock market crashes in October 1987 and October 1989 to determine whether the price lead-lag relationship, the volatility spillovers and asymmetric effects changed between the three-month U.S. Treasury Bill (TB) and the three-month Eurodollar (ED) money markets. In addition, we explore whether the investors' learning effect changed. The Co-integration of Engle and Granger (1987) is applied to test the long-term equilibrium between the TB and ED futures. Additionally, in order to consider the heteroskedasticity of the TB and ED futures prices, the bivariate EGARCH Model with the Error Correction Model (ECM) techniques is utilized to examine the short-term dynamic interactions of price and volatility between the TB and ED futures markets. Empirical results indicate that the lead-lag (feedback) relationships exist between TB and ED futures prices (or returns) after the stock crashes. Additionally, there exists a volatility asymmetry in both TB and ED futures markets with volatility spillovers to the other market after the stock crashes, implying that the speeds of the response for good news and bad news are different in both markets. Obviously, investors pay more attention to the information after the stock crashes in order to secure any profit in the money market.
Any announcement from the Federal Reserve has a huge impact on the interest rate markets. The press releases from the Federal Open Market Committee (FOMC) are major inputs to the market and the random intervention model is applied to interest rate futures transaction data to measure FOMC announcement impact. Missing prices during non-trading time periods are imputed iteratively during the estimation of model parameters. The study shows that the market trading on the announcement day is different from the market trading on a non-announcement for both the Eurodollar and T-Note futures market.
This paper uses Fama's regression approach to measure the relative importance of time-varying term premiums and expected future spot interest rates embedded in forward Eurodollar interest rates. The forward-spot spread always has reliable power in predicting future spot interest rates, especially during the October 1979 to September 1982 period.
This paper presents empirical evidence on the short-run dynamics of the six Eurocurrency rates with short-end maturities. Cointegration tests indicate that both the short rate and long rate are cointegrated. Estimations of the “transfer function-error correction model” indicate that both the change of the long-term interest rate and the error-correcting term are highly significant. The evidence shows that the error correction term has longer time lags, indicating that the error correction representation is more accurately specified as a nonlinear model, although the first-order lag is found to be a good approximation.
This paper analyzes the short end of the maturity spectrum of Euro interest rates using recent monthly data. The data for the Euro franc and Euro DM interest rates support the (rational) expectations hypothesis, whereas those true for Euro dollar interest rates do not. This result is explained by the different approaches used to conduct monetary policy in the USA, Switzerland, and West Germany.
Using U.S. Treasury bill and Eurodollar futures to proxy for domestic and external interest rates, respectively, this study examines ex ante interest rate transmission across markets for the period 1982-1991. The results indicate that these interest rates are cointegrated and that they Granger-cause each other, implying that both domestic and offshore interest rates move together and that both markets are integrated. Interest rate transmission is found to be more rapid in recent years, a result supporting the idea that the international financial markets are becoming more integrated. Copyright 1995 by MIT Press.
Zusammenfassung ZinssÄtze in den USA und auf den EurodollarmÄrkten. — Diese Arbeit entwickelt eine Theorie der Gleichgewichts-Zinsdifferenzen
zwischen heimischen und auswÄrtigen (Euro-) ZinssÄtzen auf der Grundlage des zusÄtzlich wahrgenommenen Risikos von Anlagen
und Darlehen im Ausland und der höheren Kosten der Regulierung, die mit dem Angebot dieser Anlagen und Darlehen im Inland
verbunden sind.
Kurzfristige VerÄnderungen der Zinsdifferenzen zwischen auswÄrtigen und heimischen MÄrkten ergeben sich nach Ansicht der Autoren
aus Unvollkommenheiten auf den heimischen MÄrkten, wie z. B. einschrÄnkenden Vorschriften und oligopolistischen Marktbedingungen.
Empirische Tests für US- und Eurodollar-ZinssÄtze für die Jahre 1974—1978 bestÄtigen die Hypothese, da\ die Eurodollar-SÄtze
schneller auf VerÄnderungen der Kreditbedingungen reagieren als die US-Bankraten.
This study has two purposes. One is to examine the substantive question: Is there statistical evidence that money is "exogenous" in some sense in the money- income relationship? The other is to dis- play in a simple example some time-series methodology not now in wide use. The main methodological novelty is the use of a direct test for the existence of unidirec- tional causality. This test is of wide im- portance, since most efficient estimation techniques for distributed lags are invalid unless causality is unidirectional in the sense of this paper. Also, the paper illus- trates the estimation of long lag distribu- tions without the imposition of the usual restrictions requiring the shape of the dis- tribution to be rational or polynomial. The main empirical finding is that the hypothesis that causality is unidirectional from money to income agrees with the postwar U.S. data, whereas the hypoth- esis that causality is unidirectional from income to money is rejected. It follows that the practice of making causal inter- pretations of distributed lag regressions of income on money is not invalidated (on the basis of this evidence) by the existence of "feedback" from income to money.
Zusammenfassung Die Integration der Eurodollar-und US-GeldmarktsÄtze auf dem Terminmarkt. —In diesem Aufsatz wird die Beziehung zwischen den
TerminsÄtzen für Eurodollars, amerikanische Schatzwechsel und amerikanische verbriefte Termineinlagen untersucht. Dabei wird
die Granger-KausalitÄt unter Verwendung der tÄglichen PreisÄnderungen für Kontrakte zum Juni, September und Dezember {dy1982}
getestet. Im Ergebnis zeigt sich, da\ sich die Preise auf den TerminmÄrkten für Eurodollars und für amerikanische Geldmarktinstrumente
gleichzeitig anpassen, ganz im Gegensatz zum Kassamarkt. Dieses unterschiedliche Verhalten beider MÄrkte kann durch institutionelle
Hindernisse (z. B. Restriktionen bei der Zulassung von Banken und hinsichtlich der Kapitalströme), strukturelle Besonderheiten
der MÄrkte (MindestbetrÄge für Transaktionen und die Marktmacht einiger Banken) und/oder Transaktionskosten erklÄrt werden.
Die Bildung von TerminmÄrkten in den Vereinigten Staaten und in Gro\britannien könnte dazu beitragen, die Zahl der Marktteilnehmer
auf den internationalen GeldmÄrkten zu vergrö\ern und bisher bestehende Marktunvollkommenheiten zu verringern.
This paper presents an empirical investigation of the relation between government financing decisions and asset returns. In particular, the focus is on whether a substitution of debt financing for tax financing of a given level of expenditures is associated with an increase in interest rates. The paper brings a different perspective to empirical investigations of government fiscal policies by examining the response of asset prices in an efficient capital market to such policies rather than focusing on aggregate consumption behavior. The results are consistent with the idea that asset prices are unrelated to how the government finances its expenditures. The results, however, also indicate that the capital market is not indifferent with respect to the level of government expenditures as higher interest rates are associated with increases in government purchases.
This paper analyzes an important class of models in which expectations play an important role. Topics included in the analysis are tests of: (1) rationality of forecasts in either market or survey data, (2) capital market efficiency, (3) the short-run neutrality of monetary policy and, (4) Granger causality in macroeconometric models. The common elements of these tests are highlighted. In particular, cross-equation tests for rationality or the short-run neutrality of money are shown to be equivalent to more common regression tests in the literature. These results demonstrate that the exact specification of the relevant information set used in rational forecasts is not necessary for the cross-equation tests to have desirable asymptotic properties. Also discussed are the conditions for identification of coefficients and testability of hypotheses.
This paper investigates the interdependence of the term structure of Eurocurrency interest rates. Our results suggest that when the central banks of Switzerland and West Germany increased their intervention in foreign exchange markets after the October 1979 monetary policy regime change in the USA, a significant relationship developed between short-term Eurodollar interest rates and long-term Euromark and Swiss Eurofranc interest rates. Common cross- country exchange-rate expectation errors are exploited to improve the efficiency of the estimates using Zellner's seemingly unrelated regressions.
This paper discusses eight alternative tests of the absence of casual ordering, all of which are asymptotically valid under the null hypothesis in the sense that their limiting size is known. Their behavior under alternatives is compared analytically using the concept of approximate slope, and these results are supported by the outcomes of Monte Carlo experiments. The implications of these comparisons for applied work are unambiguous: Wald variants of a test attributed to Granger, and a lagged dependent variable version of Sim's test introduced in this paper, are equivalent in all relevant respects and are preferred to the other tests discussed.
This paper examines the linkages between the Eurodollar and US domestic financial markets. It is shown that using weekly data allows the isolation of significant fluctuations being transmitted between markets in both directions. In particular, financial markets in the US are affected significantly by foreign events.It is impossible to reach precise conclusions about the causes of historical variation in the rates. However, this paper provides evidence that at most 40% of the variation in Eurodollar interest rates over the 1975–1978 period can be traced to domestic US sources and that between about one-fifth and two-thirds of the variation in domestic rates can be traced to foreign sources.
This paper proposes and tests the joint hypothesis that (1) the bond market is efficient and (2) the variation in long-term bond rates is due solely to expectations effects. Under this joint hypothesis, long-term bond rates for any fixed maturity follow (approximately) a martingale sequence. Tests with Canadian data serve not only to support the joint hypothesis but also to cast doubt upon the usefulness of the "preferred habitat" model of Modigliani-Sutch and Modigliani-Shiller as well as several single-equation macro models of interest-rate determination.
Changes in variance, or volatility, over time can be modeled using the approach based on autoregressive conditional heteroscedasticity. Another approach is to model variance as an unobserved stochastic process. Although it is not easy to obtain the exact likelihood function for such stochastic variance models, they tie in closely with developments in finance theory and have certain statistical attractions. This article sets up a multivariate model, discusses its statistical treatment, and shows how it can be modified to capture common movements in volatility in a very natural way. The model is then fitted to daily observations on exchange rates.
This paper calculates indices of central bank autonomy (CBA) for 163 central banks as of end-2003, and comparable indices for a subgroup of 68 central banks as of the end of the 1980s. The results confirm strong improvements in both economic and political CBA over the past couple of decades, although more progress is needed to boost political autonomy of the central banks in emerging market and developing countries. Our analysis confirms that greater CBA has on average helped to maintain low inflation levels. The paper identifies four broad principles of CBA that have been shared by the majority of countries. Significant differences exist in the area of banking supervision where many central banks have retained a key role. Finally, we discuss the sequencing of reforms to separate the conduct of monetary and fiscal policies. IMF Staff Papers (2009) 56, 263–296. doi:10.1057/imfsp.2008.25; published online 23 September 2008
This paper calculates indices of central bank autonomy (CBA) for 163 central banks as of end-2003, and comparable indices for a subgroup of 68 central banks as of the end of the 1980s. The results confirm strong improvements in both economic and political CBA over the past couple of decades, although more progress is needed to boost political autonomy of the central banks in emerging market and developing countries. Our analysis confirms that greater CBA has on average helped to maintain low inflation levels. The paper identifies four broad principles of CBA that have been shared by the majority of countries. Significant differences exist in the area of banking supervision where many central banks have retained a key role. Finally, we discuss the sequencing of reforms to separate the conduct of monetary and fiscal policies. IMF Staff Papers (2009) 56, 263–296. doi:10.1057/imfsp.2008.25; published online 23 September 2008
Zusammenfassung Der Zinszusammenhang zwischen heimischen und ausländischen Dollaranlagen. — Die laufenden Anpassungen und Veränderungen in
den Beziehungen zwischen den intemationalen Devisenmärkten seit den frühen 70er Jahren machen es erforderlich, den intemationalen
Zinszusammenhang ständig neu zu überprüfen. Gegenstand wissenschaftlichen Interesses ist der Einflu\ von Erträgen aus heimischen
Dollarguthaben auf die Erträge vergleichbarer ausländischer Dollaranlagen, der von Hendershott und später anderen geschätzt
und erweitert wurde. In dem vorliegenden Artikel werden anstelle der Erträge von Schatzwechseln die Erträge von handelbaren
Depositenscheinen als wichtigste Bestimmungsgrö\e für Veränderungen der Eurodollar-Zinssätze benutzt. Als Technik wurden Hendershotts
Regressionsverfahren und die Analyse der partiellen Korrelationskoeffizienten verwendet. Sowohl auf der Grundlage der gesamten
als auch der residualen erklärten Varianz erweisen sich die Erträge von Depositenscheinen regelmä\ig denjenigen von Schatzwechseln
überlegen, und die Unterschiede im Erklärungswert sind grö\er als erwartet.
This paper examines the ability of forward rates that are implicit in the term structure of Eurocurrency interest rates to predict future interest rates and to incorporate the information in past interest rates. The findings suggest that forward rates are unbiased estimators of future interest rates but are not optimal predictors of future interest rates. Further evidence does not provide support for the presence of a systematic risk premium on forward rates. The findings of this study suggest also that the Eurocurrency market is efficient in incorporating information contained in the history of interest rates into the forward rate. In addition, this paper shows that, in conformity with the efficient market hypothesis, errors of prediction based on forward rates are not related to past changes of interest rates.© 1982 JIBS. Journal of International Business Studies (1982) 13, 71–83
There occurs on some occasions a difficulty in deciding the direction of causality between two related variables and also whether or not feedback is occurring. Testable definitions of causality and feedback are proposed and illustrated by use of simple two-variable models. The important problem of apparent instantaneous causality is discussed and it is suggested that the problem often arises due to slowness in recordhag information or because a sufficiently wide class of possible causal variables has not been used. It can be shown that the cross spectrum between two variables can be decomposed into two parts, each relating to a single causal arm of a feedback situation. Measures of causal lag and causal strength can then be constructed. A generalization of this result with the partial cross spectrum is suggested.The object of this paper is to throw light on the relationships between certain classes of econometric models involving feedback and the functions arising in spectral analysis, particularly the cross spectrum and the partial cross spectrum. Causality and feedback are here defined in an explicit and testable fashion. It is shown that in the two-variable case the feedback mechanism can be broken down into two causal relations and that the cross spectrum can be considered as the sum of two cross spectra, each closely connected with one of the causations. The next three sections of the paper briefly introduce those aspects of spectral methods, model building, and causality which are required later. Section IV presents the results for the two-variable case and Section V generalizes these results for three variables.
We study the functioning of secured and unsecured interbank markets in the presence of credit risk. The model generates empirical predictions that are in line with developments during the 2007–09 financial crisis. Interest rates decouple across secured and unsecured markets following an adverse shock to credit risk. The scarcity of underlying collateral may amplify the volatility of interest rates in secured markets. We use the model to discuss various policy responses to the crisis.
There occurs on some occasions a difficulty in deciding the direction of causality between two related variables and also whether or not feedback is occurring. Testable definitions of causality and feedback are proposed and illustrated by use of simple ...
The impact of a money stock increase on nominal short-term interest rates has been a hotly debated issue in the monetary economics literature. The most commonly held view -- also a feature of most structural macro models--has an increase in the money stock leading, at least in the short-run, to a decline in short interest rates. Monetarists dispute this view because they believe that it ignores the dynamic effects of a money stock increase. This paper is an application of efficient markets-rational expectations theory to analyze empirically the relationship of money supply growth and short- term interest rates. This approach has the advantage over earlier research on this subject in that it imposes a theoretical structure that allows easier interpretation of the empirical results as well as more powerful statistical tests. In the interest of ascertaining the robustness of the results, many different empirical tests are carried out in this paper, and they uniformly do not support the proposition that increases in the money supply are correlated with declines in short rates.
Recent empirical research on the term structure of interest rates has shown that the long-term interest rate is well described by a distributed lag on short-term interest rates, but does not conform to the expectations theory of the term structure. It has been suggested that the long rate "overreacts" to the short rate. This paper presents aunified taxonomy of risk premia, or deviations from the expectations theory. This enables the hypothesis of overreaction to be formally stated. It is shown that, if anything, the long rate has underreacted to the short rate. However, the independent movement of the long rate is primarily responsible for the failure of the expectations theory. Economics
A Simple Account of the Behavior of Long-Term Interest Rates,' ;Varional Bureau of Economic Research, Inc. Working Paper No. 1203Forward Rates as Predictors of Future Interest Rates in the Eurocurrency XIarket
- J Y Campbell
- R J Asd
- Shiller
CAMPBELL, J.Y., ASD R.J. SHILLER, 'A Simple Account of the Behavior of Long-Term Interest Rates,' ;Varional Bureau of Economic Research, Inc. Working Paper No. 1203, September 1983. COSSET, J., 'Forward Rates as Predictors of Future Interest Rates in the Eurocurrency XIarket,'Journrtl of Interr~~~tionai Bwiness, Winter 1982, 71-83.
Time Series Evidence on the Expectations Hypothesis of the Term Structure,' Carnryir-Rorhrsfer Conferrnrr Series 011 P~~D
- Fl \vis
- Al
FL.\VIS, Al., 'Time Series Evidence on the Expectations Hypothesis of the Term Structure,' Carnryir-Rorhrsfer Conferrnrr Series 011 P~~D//c Po/ir_v, 1984, 20: 21 l-237.
Eurodollar Arbitrage,' Federal Reserve Bank of New IbrkQuarter~ Rechew
- L L Kreicher
KREICHER, L.L., 'Eurodollar Arbitrage,' Federal Reserve Bank of New IbrkQuarter~ Rechew, Summer 1982, 7: 10-20.
The Interdependence of the Term Structure of Eurocurrency Interest Rates Jooral q' International Alon and Finam?The Structure of International Interest Rates: An Extension of Hendershotr's Tests
- R Khol
KHOL, R., 'The Interdependence of the Term Structure of Eurocurrency Interest Rates,' Jooral q' International Alon and Finam?, June 1986, 5: 2455253. KWACK, S.Y., 'The Structure of International Interest Rates: An Extension of Hendershotr's Tests,' Journa/ of Finance, September 1971, 26: 897-900.
Term Premia on Euro RatesJnurna/ofFinanteIs the Preferred-Habitat Model of the Term Structure Inconsistent with Financial hIarket Efficiency?
- D E Logue
- R J Asd
- Sweesey
LOGUE, D.E., ASD R.J. SWEESEY, 'Term Premia on Euro Rates,'Jnurna/ofFinante, July 1984.39: 747-754. hlrs~nrr, F.S., 'Is the Preferred-Habitat Model of the Term Structure Inconsistent with Financial hIarket Efficiency?,' Jo~~rna/ of Po/itica/ Economy, April 1980, 88: 406-411.
The Term Structure of Interest Rates in the hiIT-PESS-SSRC hlodel
- L Phillips
- J Asd
- Pippesger
PHILLIPS, L., ASD J. PIPPESGER, 'The Term Structure of Interest Rates in the hiIT-PESS-SSRC hlodel,' Journa/ of hloq, Credit, and Banking, May 1979, 11: 151-164.
Eurodollar Arbitrage
- Kreicher
The Structure of International Interest Rates: An Extension of Hendershott's Tests
- Kwack
The Structure of International Interest Rates: The U.S. Treasure Bill Rate and The Eurodollar Deposit Rate
- Hendershott