THE FRENCH-GERMAN INTEREST RATE DIFFERENTIAL SINCE GERMAN

Jerome Henry () and Jens Weidmann
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Jens Weidmann: Bundesbank

International Finance from EconWPA

Abstract: We investigate the consequences of the 1992-1993 EMS crises, which resulted in the widening of the exchange rate bands, on the long-run linkages between the daily 1-month-Eurorates on German Mark, US-Dollar and French Franc. First, within a Gaussian VAR, both the US Eurorate and the French-German Eurorate differential are found stationary between December 1990 and December 1993. Second, using various GARCH models to account for heteroskedasticity show that Gaussian models can be misleading as to the interpretation of the linkages. Third, the estimated variance parameters are stable and the July 1993 episode is not linked to especially high a volatility. Finally, focusing on the French rate, we find asymmetry in the stochastic volatility, positive shocks being more persistent.

Keywords: Interest rates; cointegration; heteroskedasticity; GARCH; EMS; Asymmetry in the ERM (search for similar items in EconPapers)
JEL-codes: F3 F4 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-ifn and nep-mon
Date: 2005-03-30
Note: Type of Document - pdf; pages: 40. Has appeared as: University of Bonn (SFB303), Discussion Paper No. B-295
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpif:0503009

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