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Independent Policy, Dependent Outcomes: A Game of Cross-Country Dominoes across European Yield Curves

Ioannis Chatziantoniou, David Gabauer and Alexis Stenfor
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Alexis Stenfor: University of Portsmouth

Authors registered in the RePEc Author Service: Alexis Stenfors ()

No 2021-06, Working Papers in Economics & Finance from University of Portsmouth, Portsmouth Business School, Economics and Finance Subject Group

Abstract: This study investigates the dynamic transmission mechanism between 2Y, 5Y and 10Y interest rate swaps (IRS) for six European currencies (CHF, DKK, EUR, GBP, NOK and SEK) from August 6, 1999 to March 4, 2021 applying the time-varying parameter vector autoregressive connectedness approach in the spirit of Antonakakis et al. (2020). Furthermore, the connectedness approach (Diebold and Yılmaz, 2012, 2014) is extended to allow analyzing aggregated and conditional connectedness measures which improve their interpretability and obtain more in-depth information concerning the cross-maturity/cross-currency propagation mechanism. We document that EUR and DKK have been the most prominent transmitters of shocks in the network. We also find that the 10Y IRS has increasingly assumed a net-transmitting role at the expense of the 2Y IRS – in line with a shift towards unconventional monetary policy and quantitative easing. From a policymaking perspective, this implies means that the role of the domestic short-term interest rate has lost relevance for the monetary transmission mechanism at the expense of the foreign long-term interest rate.

Keywords: Dynamic Connectedness; Aggregated Connectedness, Conditional Connectednes; Interest Rate Swaps; TVP-VAR; Yield Curves. (search for similar items in EconPapers)
JEL-codes: C32 C5 F3 G15 (search for similar items in EconPapers)
Pages: 31
Date: 2021-05-25
New Economics Papers: this item is included in nep-eec, nep-mac and nep-mon
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