Modeling Euro Area Benchmark Rates After the End of LIBOR

Flavio Angelini (), Stefano Herzel () and Marco Nicolosi ()
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Flavio Angelini: University of Perugia
Stefano Herzel: DEF, University of Rome "Tor Vergata", http://www.ceistorvergata.it
Marco Nicolosi: Università La Sapienza, http://www.ceistorvergata.it

No 613, CEIS Research Paper from Tor Vergata University, CEIS

Abstract: We adopt an affine short-rate model for the contemporaneous evolution of the term structures based on EURIBOR and on eSTR. The model is based on the observation that the risk-free rate follows a constant trajectory and moves only at deterministic times (depending on the European Central Bank meetings). We calibrate the model using Kalman filtering on a panel of term structure zero rates and compare its performances to the dynamic version of the Nelson-Siegel model, both in- and out-of-sample. The model is able to reproduce some common features of the term structure dynamics, such as the “snake” shaped term structure volatility and the fact that the volatility increases in periods containing the meeting dates. We analyze the sensitivity of the eSTR term structure to variations in monetary policy expectations and apply the model to estimate the level and the probability distribution of the future rates, and to show how to compute the fallback risk of a on-going contract in case EURIBOR would be replaced by eSTR.

Keywords: Affine Short-Rate Models; Bond Yields; Deterministic Jump Times; Fallback Risk; eSTR Transition (search for similar items in EconPapers)
JEL-codes: C5 C6 E4 E5 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2024-10-07, Revised 2025-10-07
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