Euro-dollar Rate Research Articles

Causal linkages between US and Eurodollar interest rates: further evidence

This study examines causal linkages between US and Eurodollar interest rates during 1983–2002. Recursive cointegration analysis shows that a stable cointegration relationship between the two interest rates emerges only since the early 1990s, when the Fed used federal funds rate targeting and eliminated the reserve requirement on Eurocurrency deposits. The study further reveals that bidirectional causality exists between the two rates over the period of 1993 to 2002, while unidirectional causality from Eurodollar rate to the US rate is found to exist over the period of 1983 to 1991. These findings consistently support increased interest rate linkages especially since the early 1990s.

Information in the Term Structure of LIBOR Interest Rates

Using Eurodollar futures prices to assess information in the term structure of interest rates we find that Eurodollar futures rates have power to forecast period profits in the Eurodollar futures market (based on LIBOR). The more interesting discovery is that short-term implied futures rates have very little power in forecasting future changes in spot rates in the Eurodollar futures market. Instead, evidence in our regressions suggests that information in the term structure of LIBOR is contained in the longer maturity Eurodollar futures contracts.

Implied derivative security prices based two-factor interest model: a UK application

In this paper the extended Box Method recently introduced to finance is used to value bond and option prices based on the two-factor CKLS interest rate model. The two-factor CKLS model is estimated using the one-year Eurodollar rate for the UK as the long rate and either the one-week, or one-month Euro dollar rate for the UK as the short rate. Overall, it is found that both and option prices are sensitive to the model used.

Exchange Rates and Capital Flows

Abstract This paper explores the ability of portfolio and foreign direct investment flows to track movements in the euro and the yen against the dollar. Net portfolio flows from the euro area into US stocks – possibly reflecting differences in expected productivity growth – track movements in the euro against the dollar closely. Net FDI flows, which capture the recent burst in cross‐border M&A activity, appear less important in tracking movements in the euro‐dollar rate, possibly because many M&A transactions consist of share swaps. Movements in the yen versus the dollar remain more closely tied to conventional variables such as the current account and interest differential.

A General Model for Hedging Swaps with Eurodollar Futures

A hedging model based on a cubic spline interpolation methodology model automatically reflects timing differences between futures maturities and swap payment dates, actual maturities of the three-month Eurodollar deposits that underlie the futures contract, and the convexity bias defining the difference between Eurodollar futures and forward rates. The model allows futures with overlapping maturities to be used rather than limiting hedging to contracts that are part of the regular March, June, September, and December maturity cycle. Tests of the model for calendar year 2001 for both a single swap and a swap book show it to be effective in hedging the interest rate risk of LIBOR-based swaps.

A Semiparametric Diffusion Model for the Short Term Interest Rate

We propose a semiparametric single-factor diffusion model for the term structure of interest rate. The model is highly flexible and encompasses most parametric single-factor models proposed in the literature. We fit the semiparametric model to a proxy of the Eurodollar short term interst rate and compare it with the most flexible parametric model found in the literature: First directly, by testing the fully parametric model against the semiparametric one. Secondly, we look at how much the bond prices predicted by the competing models differ; this yields an alternative measure of the performance of the models. The fitted semiparametric model picks up nonlinearities which the fully parameteric model cannot capture. This leads to a rejection of the parametric model in favour of the semiparametric model in the direct comparison of the two fitted models. Moreover, the calculated bond prices implied by the two competing models are shown to be significantly different.

2003 Sonuna Doğru Kur Ve Ödemeler Dengesindeki Gelişmeler

The paper focuses on recent developments in the exchange rate and the balance of payments in Turkey. Against the general consensus it argues that TL is only moderately overvalued. The 12% overvaluation in October 2003, compared to end-1999, is largely offset by the decrease in unit labor costs in the manufacturing sector; hence exports are at a record high level despite the real appreciation. The increase in imports, on the other hand, is claimed to be largely the consequence of increased economic activity, rather than appreciation of the TL. The volatility in the Euro-Dollar cross rate has resulted in a higher degree of appreciation of the TL against the Dollar than the Euro. This has affected the direction of trade. Also, the composition of exports seems to change in favor of sectors with higher degree of dependence on imported inputs. Under the floating rate regime, the current account deficit, which is expected to reach 7 billion dollar level by end-2003, will result in increased demand for foreign exchange, and this in return, raising the exchange rate, may bring the TL back to its equilibrium level, whatever it may be.

Exponentially damped Lévy flights, multiscaling, and exchange rates

We employ our previously suggested exponentially damped Lévy flight (Physica A 326 (2003) 544) to study the multiscaling properties of 30 daily exchange rates against the US dollar together with a fictitious euro-dollar rate (Physica A 286 (2000) 353). Though multiscaling is not theoretically seen in either stable Lévy processes or abruptly truncated Lévy flights, it is even characteristic of smoothly truncated Lévy flights (Phys. Lett. A 266 (2000) 282; Eur. Phys. J. B 4 (1998) 143). We have already defined a class of “quasi-stable” processes in connection with the finding that single scaling is pervasive among the dollar price of foreign currencies (Physica A 323 (2003) 601). Here we show that the same goes as far as multiscaling is concerned. Our novel findings incidentally reinforce the case for real-world relevance of the Lévy flights for modeling financial prices.

Intraday Predictability of Overnight Interest Rates

It has been found in the literature that the overnight Eurodollar rate and the effective Fed funds rate exhibit similar calendar-day effects caused by the Federal Reserve regulations and accounting conventions and characteristics of the Fed funds market. However, it was not documented whether the effects are the same on the two interest rates. This paper finds that the effects are smaller on the overnight Eurodollar rate than on the Fed funds rate. Even if the overnight Eurodollar market is affected by the Fed funds market, the overnight Eurodollar market is not perfectly integrated with the Fed funds market.

Using discrete-time techniques to test continuous-time models for nonlinearity in drift

This paper examines whether or not a discrete-time econometric test for nonlinearity in mean may be used in cases where the data are believed to be generated in continuous time. It is demonstrated that appropriate bootstrapping techniques are required to yield a test statistic with sensible statistical properties. The technique is demonstrated by using it to examine 7-day Eurodollar rates for nonlinearity in mean.

An empirical examination of the intraday volatility in euro–dollar rates

We examine hourly observations of one-month euro–dollar rates using the GARCH model from Baillie and Bollerslev (1990) and find an intraday volatility pattern with two important components. First, intraday volatility is largest during regular business hours in the Asian markets and smallest during regular business hours in the U.S. This result is in contrast to the previously identified intraday volatility patterns in the currency exchange rates. Second, we find volatility spikes at the beginning of the business day in Tokyo, London, and New York. Currency exchanges rates also show volatility spikes at the beginning of the business day in Tokyo, London, and New York. We interpret these results as support for the model by Hong and Wang (2000) which suggests that volatility clusters at the beginning and end of the regular business day, even in the absence of market closures, if most traders are not active during regular non-business hours.

Statements of ECB Officials and Their Effect on the Level and Volatility of the Euro-Dollar Exchange Rate

This paper studies the reaction of the mean and volatility of the euro-dollar exchange rate to statements of ECB officials during the first years of EMU. We focus on statements on monetary policy and the (potential) strength of the euro. We find that the Bundesbank has dominated the news coverage. We conclude that ECB statements have mainly influenced volatility. In some cases there are effects of statements on the level of the euro-dollar rate. Efforts to ‘talk up’ the euro have not been successful. There is also evidence of asymmetric reactions to news.

On the Specification of the Drift and Diffusion Functions for Continuous‐time Models of the Spot Interest Rate*

This paper explores the specification of drift and diffusion functions for continuous-time short-term interest rate models. Various forms for the drift and diffusion of 7-day Eurodollar rates are proposed and then estimated by discrete maximum-likelihood. The results suggest that a nonparametric specification of drift and volatility in terms of orthogonal polynomial expansions is effective in eliminating problems of parameter identification encountered previously. Some evidence is found to support the claim that the drift of the short term interest rate is nonlinear.

Triangular arbitrage as an interaction among foreign exchange rates

We first show that there are in fact triangular arbitrage opportunities in the spot foreign exchange markets, analyzing the time dependence of the yen–dollar rate, the dollar–euro rate and the yen–euro rate. Next, we propose a model of foreign exchange rates with an interaction. The model includes effects of triangular arbitrage transactions as an interaction among three rates. The model explains the actual data of the multiple foreign exchange rates well.

The Federal funds market and the overnight Eurodollar market

This paper investigates the effect of daily management of Federal Reserve accounts by US depository institutions on the interest rate outside the US. Spindt and Hoffmeister (Journal of Financial and Quantitative Analysis 23 (1988) 401), Griffiths and Winters (Journal of Banking and Finance 19 (1995) 1265) and Hamilton (Journal of Political Economy 104 (1996) 22) found that the Fed funds rate exhibited calendar day effects caused by Federal Reserve regulations. I find that the overnight Eurodollar rate shows similar predictable daily changes as does the Fed funds rate although the absolute magnitudes are slightly less. The empirical results support the hypothesis that the tendencies in daily changes in the two overnight interest rates are caused by the characteristics of the Fed funds market.

Testing the Diffusion Coefficient

In mathematical finance diffusion models are widely used and a variety of different parametric models for the drift and diffusion coefficient coexist in the literature. Since derivative prices depend on the particular parametric model of the diffusion coefficient function of the underlying, a misspecification of this function leads to misspecified option prices. We develop two tests about a parametric form of the diffusion coefficient. The finite sample properties of the tests are investigated in a simulation study and the tests are applied to the 7 -day Eurodollar rate, the German stock market index DAX and five German stocks. For all observed processes, we find in the empirical analysis that our tests reject all tested parametric models. We conclude that affine diffusion processes might not be appropriate to model the evolution of financial time series and that a successful model for a financial market should incorporate the history of the observed processes of additional sources of randomness like stochastic volatility models.

Nonparametric Specification Testing for Continuous-Time Models with Application to Spot Interest Rates

We propose two nonparametric transition density-based speciþcation tests for continuous-time diffusion models. In contrast to marginal density as used in the literature, transition density can capture the full dynamics of a diffusion process, and in particular, can distinguish processes with the same marginal density but different transition densities. To address the concerns of the þnite sample performance of nonparametric methods in the literature, we introduce an appropriate data transformation and correct the boundary bias of kernel estimators. As a result, our tests are robust to persistent dependence in data and provide reliable inferences for sample sizes often encountered in empirical þnance. Simulation studies show that our tests have reasonable size and good power against a variety of alternatives in þnite samples even for data with highly persistent dependence. Besides the single-factor diffusion models, our tests can be applied to a broad class of dynamic economic models, such as discrete time series models, time-inhomogeneous diffusion models, stochastic volatility models, jump-diffusion models, and multi-factor term structure models. When applied to daily Eurodollar interest rates, our tests overwhelmingly reject some popular spot rate models, including those with nonlinear drifts that some existing tests can not reject after correcting size distortions. We þnd that models with nonlinear drifts do not signiþcantly improve the goodness-of-þt, and the main source of model inadequacy seems to be the violation of the Markov assumption. We also þnd that GARCH, regime switching and jump diffusion models perform signiþcantly better than single-factor diffusion models, although they are far from being adequate to fully capture the interest rate dynamics. Our study shows that nonparametric methods are a reliable and powerful tool for analyzing þnancial data.

The uncovered parity properties of the czech koruna

The paper studies the compliance of the CZK - EUR exchange rate with the uncovered parity of returns on assets denominated in the two named currencies. A comparison with the same property for the euro-dollar rate is made. An uncovered total return parity (UTRP) formula is derived from the equilibrium in a portfolio optimization model with liquidity constraints. It is shown that the uncovered parity of total returns, and not of short-term money market rates, is a natural outcome of stochastic equilibrium asset pricing models that generalize the International Consumption-based Capital Asset Pricing Model. Accordingly, the traditional uncovered interest rate parity should be replaced by UTRP in empirical analysis. UTRP tests for the CZK/EUR and the USD/EMU currency pairs are conducted using yields of long-term government bond yields. UTRP typically holds, although the time horizons and measures of exchange rate movements, for which it becomes visible, may vary.

Exchange Rates and Capital Flows

This paper explores the ability of portfolio and foreign direct investment flows to track movements in the euro and the yen against the dollar. Net portfolio flows from the euro area into U.S. stocks—possibly reflecting differences in expected productivity growth—track movements in the euro against the dollar closely. Net FDI flows, which capture the recent burst in cross-border M&A activity, appear less important in tracking movements in the euro-dollar rate, possibly because many M&A transactions consist of share swaps. Movements in the yen versus the dollar remain more closely tied to such conventional variables as the current account and interest differential.

Relationship Between Expected Treasury Bill and Eurodollar Interest Rates: A Fractional Cointegration Analysis

In this paper, we extend Booth and Tse's (BT)1995 analysis of fractional cointegration between theexpected Eurodollar and Treasury bill interest ratesimplied by their respective futures contracts. Thedefinition of fractional cointegration suggested byCheung and Lai (1993) and used by BT is refined sothat it requires the cointegrating relationship to bestationary as well as mean-reverting. In addition tothe Geweke and Porter-Hudak method used by BT, a moreefficient Maximum Likelihood (ML) method is used toestimate the cointegrating relationship. The LM (Engle(1982)) test indicates the possible existence of aheteroscedastic cointegrating relationship. Therefore,we use heteroscedastic models (GARCH and ExponentialGARCH) to represent the cointegrating regressioninstead of the simple homoscedastic model used by BT.The empirical evidence cannot reject the nullhypothesis of a stationary fractional cointegrationrelationship between the Eurodollar and Treasury billinterest rates.