MODELING THE EURO OVERNIGHT RATE

Ángel León (aleon@ua.es), Francis Benito and Juan Nave
Additional contact information
Ángel León: Universidad de Alicante
Francis Benito: Universidad de Alicante
Juan Nave: Universidad de Castilla-La Mancha

Working Papers. Serie AD from Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie)

Abstract: This paper describes the evolution of the daily Euro overnight interestrate (EONIA) by using several models containing the jump component such asa single regime ARCH-Poisson-Gaussian process, with either a piecewisefunction or an autoregressive conditional specification (ARJI) for the jumpintensity, and a two regime-switching process with jumps and time varyingtransition probabilities. To model the jump intensity, we include the followingeffects which are significant for the occurrence of jumps such as: (1) the end ofmaintenance period effect because of reserve requirements, (2) the end ofmonth effect, also known as the calendar day effect, caused mainly by theaccounting adjustments and finally, (3) the meeting effect caused by thefortnightly meetings of the Governing Council of the European Central Bank(ECB). These effects lead to a better performance and several of them are alsoincluded for the behavior of the transition probabilities. Since the target of theECB is keeping the EONIA rate close to the official rate, we have modeled theconditional mean of the overnight rate series as a reversion process to theofficial rate distinguishing two alternative speeds of reversion, in concrete, adifferent speed if EONIA is higher or lower than the official rate. We also studythe jumps of the EONIA rate around the ECB’s meetings by using the ex-postprobabilities of the ARJI model. Finally, we develop an out-of-sampleforecasting analysis to measure the performance of the different candidatemodels.

Keywords: ARCH-Poisson-Gaussian; Regime switching; mean reversion; Autoregressive conditional jump intensity; Maintenance period; Calendar day effect; ECB’s meeting. (search for similar items in EconPapers)
JEL-codes: C13 C22 E43 E52 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2006-06
New Economics Papers: this item is included in nep-cba, nep-fmk, nep-for, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Published by Ivie

Downloads: (external link)
http://www.ivie.es/downloads/docs/wpasad/wpasad-2006-11.pdf Fisrt version / Primera version, 2006 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ivi:wpasad:2006-11

Access Statistics for this paper

More papers in Working Papers. Serie AD from Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) Contact information at EDIRC.
Bibliographic data for series maintained by Departamento de Edición (edicion@ivie.es).