Interest rate linkages in the Eurocurrency market: Contemporaneous and out-of-sample Granger causality tests

Abstract

This paper examines linkages among major Eurocurrency interest rates during 1994–2002. Eurocurrency interest rate causal linkages are found to be much stronger with additional allowance for contemporaneous causality test results than the inference based solely on Granger causality tests. The impact of U.S. interest rates is clearly not dominant in the Eurocurrency markets, while the Japanese interest rates are found to be quite influential. German interest rates both cause, and are caused by, several other Eurocurrency interest rates. By contrast, interest rates on the new currency, the Euro, do not have a substantial influence on other Eurocurrency interest rates, which underscores its emerging status.