Comovements in Volatility in the Euro Money Market

Nuno Cassola () and Claudio Morana ()

ICER Working Papers from ICER - International Centre for Economic Research

Abstract: This paper assesses the sources of volatility persistence in Euro Area money market interest rates and the existence of linkages relating volatility dynamics. The main ?ndings of the study are as follows. Firstly, there is evidence of stationary long memory, of similar degree, in all series. Secondly, there is evidence of fractional cointegration relationships relating all series, except the overnight rate. Two common long memory factors are found to drive the temporal evolution of the volatility processes. The ?rst factor shows how persistent volatility shocks are trasmitted along the term structure, while the second factor points to excess persistent volatility at the longer end of the yield curve, relative to the shortest end. Finally, impulse response analysis and forecast error variance decomposition point to forward transmission of shocks only, involving the closest maturities.

Keywords: Money market interest rates; liquidity effect; realized volatility; fractional integration and cointegration, fractional vector error correction model. (search for similar items in EconPapers)
JEL-codes: C32 F30 G10 (search for similar items in EconPapers)
Date: 2007-03
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Persistent link: http://EconPapers.repec.org/RePEc:icr:wpicer:7-2007

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