The Power of the Euro–Sterling Rates in Explaining Asset Market Rates: A High‐frequency Analysis

Abstract

This article makes use of high‐frequency asset market data to explain unexpected changes in interest rates using the methodology proposed by Cochrane and Piazzesi (2002). This work departs from the existing literature because it uses UK market expectations to capture unexpected movements in the base rate, and explores its effect on a large number of asset market variables. Results indicate that the relation between asset market data and unexpected base rate changes is stronger and more consistent than the relation between asset market data and raw base rate changes. Results appear to be robust to extreme value changes.