Volatility of interest rates in the euro area: Evidence from high frequency data

Nuno Cassola and Claudio Morana

The European Journal of Finance, 2006, vol. 12, issue 6-7, 513-528

Abstract: The paper studies the euro area money market from a microstructure perspective. The focus is on the empirical estimation of the factors underlying the volatility of the overnight interest rate and its transmission along the money market yield curve. Two sources of volatility are separated out, one related to the institutional features of the operational framework and payments system, and the other, related to the impact of policy decisions. A novel data set is used composed of hourly observations and covering several short-term interest rates. The sample runs from 4/12/2000 to 31/05/2002. Two common long-memory factors are found to drive the volatility processes. The first explains the long-memory dynamics of the shortest maturity. The other explains the transmission of volatility to other maturities. It is shown that announcements of interest rate changes exercise the strongest impact on the volatility of the shortest maturities. Persistent effects of liquidity shortages that are transmitted along the money market yield curve are documented. However, these effects are not the rule and can be explained by exceptional circumstances.

Keywords: Money market microstructure; stochastic volatility; fractional integration and cointegration (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (5)

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Working Paper: Volatility of interest rates in the euro area: evidence from high frequency data (2003)
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DOI: 10.1080/13518470500162758

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