Relationship between Treasury bills and Eurodollars: Theoretical and Empirical Analyses

Cheng Few Lee, Keshab Shrestha and Robert Welch ()

Review of Quantitative Finance and Accounting, 2007, vol. 28, issue 2, 163-185

Abstract: In this paper, we derive an equilibrium relationship between the yields on Eurodollar and Treasury bills based on equivalent martingale results derived by Harrison and Kreps ( 1979 ) and Harrison and Pliska ( 1981 , 1983 ) as well as the corporate debt pricing model developed by Merton ( 1974 ). The derived equilibrium relationship incorporates the models used by Booth and Tse ( 1995 ) and Shrestha and Welch ( 2001 ) as special cases. The equilibrium relationship indicates that the conditional volatility of the yield on Eurodollars explains the variation in the TED spread. We empirically test the equilibrium relationship using a GARCH-M model and the concept of fractional cointegration. We use both the ex ante data implied by the respective futures contracts as well as the ex post spot data with daily, weekly and monthly frequencies. We find empirical support for the Equilibrium relationship. Copyright Springer Science+Business Media, LLC 2007

Keywords: Stationary; Fractional cointegration; TED spread (search for similar items in EconPapers)
Date: 2007
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://hdl.handle.net/10.1007/s11156-006-0006-7 (text/html)
Access to full text is restricted to subscribers.

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:kap:rqfnac:v:28:y:2007:i:2:p:163-185

Ordering information: This journal article can be ordered from
http://www.springer.com/finance/journal/11156/PS2

DOI: 10.1007/s11156-006-0006-7

Access Statistics for this article

Review of Quantitative Finance and Accounting is currently edited by Cheng-Few Lee

More articles in Review of Quantitative Finance and Accounting from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().