Abstract
This paper investigates the price and volatility relationship in European short-term interest rate markets. Cointegration analysis is used to analyse the long and short run relationship and a GARCH BEKK model is estimated to analyse the volatility transmission between the markets. The stability of the long run relationship is also examined using Bai and Perron (Econometrica 66(1),47–78, 1998, J Appl Econ 18(1):1–22, 2003) structural break methodology. The results show that the relationship between the EURIBOR spot deposit rate and the EURIBOR future contract has changed significantly since 2001 and several structural breaks are present in the 13 year sample period. During periods where there is a long run relationship present the spot deposit rate generally leads the future rate in price discovery. In the short run there is bi-directional causality present between the markets. There is also significant evidence of volatility transmission from the spot market to the futures market throughout the sample period.
Similar content being viewed by others
Notes
See ECB (2013) Financial Stability Review May 2013. Available: http://www.ecb.europa.eu
See ECB (2013)
References
Bai J, Perron P (1998) Estimating and testing linear models with Q8 multiple structural changes. Econometrica 66(1):47–78
Bai J, Perron P (2003) Computation and analysis of multiple structural change models. J Appl Econ 18(1):1–22
Beck SE (1994) Cointegration and market efficiency in commodities futures markets. Appl Econ 26(3):249–257
Bekiros SD, Diks CG (2008) The relationship between crude oil spot and futures prices: cointegration, linear and nonlinear causality. Energy Econ 30(5):2673–2685
Bollerslev T (1986) Generalized autoregressive conditional heteroskedasticity. J Econom 31(3):307–327
Brenner RJ, Kroner KF (1995) Arbitrage, cointegration, and testing the unbiasedness hypothesis in financial markets. J Financ Quant Anal 30(1):23–42
Chan K (1992) A further analysis of the lead-lag relationship between the cash market and stock index futures market. Rev Financ Stud 5(1):123–152
Chen L-H, Finney M, Lai KS (2005) A threshold cointegration analysis of asymmetric price transmission from crude oil to gasoline prices. Econ Lett 89 (2):233–239
Cheung Y-W, Fung H-G (1997) Information flows between eurodollar spot and futures markets. Multinatl Financ J 1(4):255–271
Cheung Y-W, Ng LK (1996) A causality-in-variance test and its application to financial market prices. J Econom 72(1):33–48
Chowdhury AR (1991) Futures market efficiency: evidence from cointegration tests. J Futur Mark 11(5):577–589
Chu QC, Hsieh W-LG, Tse Y (1999) Price discovery on the s&p 500 index markets: an analysis of spot index, index futures, and spdrs. Int Rev Financ Anal 8 (1):21–34
Crowder WJ, Hamed A (1993) A cointegration test for oil futures market efficiency. J Futur Mark 13(8):933–941
Darbar SM, Deb P (1997) Co-movements in international equity markets. J Financ Res 20(3):305–322
Engle RF (1982) Autoregressive conditional heteroscedasticity with estimates of the variance of united kingdom inflation. Econometrica: J Econom Soc 50(4):987–1007
Engle RF, Granger CW (1987) Co-integration and error correction: representation, estimation, and testing. Econometrica: J Econom Soc 251–276
Engle RF, Kroner KF (1995) Multivariate simultaneous generalized arch. Econom Theory 11(01):122–150
Engle RF, Ito T, Lin WL (1990) Meteor showers or heat waves? Heteroskedastic intra-daily volatility in the foreign exchange market. Econometrica 58(3):525–542
Fama EF, French KR (1987) Commodity futures prices: some evidence on forecast power, premiums, and the theory of storage. J Bus 60(1):55–73
Fung H-G, Leung WK (1993) The pricing relationship of eurodollar futures and eurodollar deposit rates. J Futur Mark 13(2):115–126
Granger CW (1988) Some recent development in a concept of causality. J Econom 39(1):199–211
Hakkio CS, Rush M (1989) Market efficiency and cointegration: an application to the sterling and deutschemark exchange markets. J Int Money Financ 8(1):75–88
Johansen S (1988) Statistical analysis of cointegration vectors. J Econ Dyn Control 12(2):231–254
Johansen S (1991) Estimation and hypothesis testing of cointegration vectors in gaussian vector autoregressive models. Econometrica: J Econom Soc 59(6):1551–1580
Kejriwal M, Perron P (2008) The limit distribution of the estimates in cointegrated regression models with multiple structural changes. J Econ 146(1):59–73
Kejriwal M, Perron P (2010) Testing for multiple structural changes in cointegrated regression models. J Bus Econ Stat 28(4):503–522
Lai KS, Lai M (1991) A cointegration test for market efficiency. J Futur Mark 11(5):567–575
MacKinnon JG (1996) Numerical distribution functions for unit root and cointegration tests. J Appl Econom 11(6):601–618
Phillips PC, Hansen BE (1990) Statistical inference in instrumental variables regression with i (1) processes. Rev Econ Stud 57(1):99–125
Ross SA (1989) Information and volatility: the no-arbitrage martingale approach to timing and resolution irrelevancy. J Financ 44(1):1–17
Staikouras SK (2004) The information content of interest rate futures and time-varying risk premia. Appl Financ Econ 14(11):761–771
Yang J, Yang Z, Zhou Y (2012) Intraday price discovery and volatility transmission in stock index and stock index futures markets: evidence from china. J Futur Mark 32(2):99–121
Zivot E (2000) Cointegration and forward and spot exchange rate regressions. J Int Money Financ 19(6):785–812
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Shaw, F., Murphy, F. & O’Brien, F. Interest rate dynamics and volatility transmission in the European short term interest rate market. J Econ Finan 40, 754–772 (2016). https://doi.org/10.1007/s12197-015-9327-5
Published:
Issue Date:
DOI: https://doi.org/10.1007/s12197-015-9327-5