Euro-dollar Rate Research Articles

Exchange Rates in Search of Fundamentals: The Case of the Euro–Dollar Rate

The following sections are included:IntroductionExchange Rate Models: Theory and Empirical EvidenceA Case Study: The Euro–dollar Rate During 1999–2000 and the FundamentalsThe Exchange Rates in Search of FundamentalsExchange Rates and Stock PricesSome Additional EvidenceImplications for Monetary Policies and for the Future of the EuroConclusionReferences

Information Transmission Across Eurodollar Futures Markets

Identical contracts traded at two distinct time zones but linked with a mutual offset system allow for round-the-clock trading. It is interesting to investigate the characteristics of information transmission in such a market. In this paper we employ GARCH specifications to model Eurodollar futures interest rate changes in IMM and in SIMEX. We employ the Causality-in-Variance test based on cross-correlation function to test hypotheses on the lead-lag relationships of volatilities between IMM and SIMEX. There is strong evidence of information transmission from IMM to SIMEX, and not vice-versa. However, during the 86 December till 88 September period, including contracts during the October 87 crash, there is evidence of causality also running from SIMEX to IMM.

The Causality Effects of the Federal Reserve's Monetary Policy on U.S. and Eurodollar Interest Rates

AbstractPrevious studies argue that U.S. interest rates will become more sensitive to changes in eurodollar rates as international financial‐market integration increases. However, the empirical results of these studies are suspect because they select their subperiods in an ad hoc manner and ignore the different trading hours of the U.S. and London markets.This study adjusts for the markets' different trading hours and uses Goldfeld and Quandt's switching regression technique to show that the causal relation between U.S. CD rates and eurodollar rates is impacted by the Federal Reserve's monetary policy. Because the latest subperiod exhibits uni‐directional causality (i.e., U.S. interest rates cause changes in eurodollar rates), the results cast doubt on the implicit assumption made in the literature that interest‐rate causality is only affected by increasing levels of financial‐market integration.

An Integrated Approach to the Hedging and Pricing of Eurodollar Derivatives

Taking the term structure of Treasury securities and Eurodollar rates as exogenous, this article provides an integrated approach to the pricing and hedging of London Inter-bank Offer Rate (LIBOR) derivatives. Our approach allows the spread between Eurodollar and Treasury rates to reflect both the credit risk in holding Eurodollar deposits and a convenience yield from holding Treasury securities. This integrated approach includes the models of Babbs (1991), Grinblatt (1994), and Jarrow and Tumbull (1995) as special cases.

The dynamics of interest rates between Eurodollar and domestic US dollar

The causal relationships between the US domestic and the Eurodollar interest rate markets are examined by estimating the error correction models, and tests are conducted to determine whether any structural change has taken place in such relationships. Empirical results show that there exists uni-directional causality leading from the US domestic market to the Eurodollar market during 1973–1982, and a significant reverse causality is observed during 1983–1992. Further evidence reveals that the impact of changes in the US domestic interest rate on the Eurodollar market is weakening over time. These results are likely due to the expansion in the size of the Eurodollar market, the more rapid movements toward deregulation in the European markets, and the presence of enhanced arbitrage opportunities via the swap and futures markets.

The relationship between U.S. and eurodollar interest rates: Evidence from the futures market

The Relationship between U.S. and Eurodollar Interest Rates: Evidence from the Futures Market. — This paper analyzes the lead/lag relationship in the Granger-cause sense between U.S. and Eurodollar interest rates in futures contracts. It shows that yields on U.S. Treasury bill and Eurodollar futures are cointegrated with the TED spread as the cointegrating vector for the period January 1987–July 1993. The error correction model indicates that the U.S. market leads the Eurodollar market. However, the presence of this unidirectional causality does not improve the forecasting of Eurodollar yields. Other evidence given in the paper suggests that the hypothesis of contemporaneous relationships, at least on daily base, is not rejected.

A model of the term structure of interest rates for an economically dependent country

This paper presents a closed form model of the term structure of interest rates for an economically dependent country. Using monthly Euroyen rates and Eurodollar rates in the London Market of the period January 1981 to December 1992, we conduct empirical tests and show that our model is consistent with the term structure of the Euroyen rates. Furthermore, comparing the predictive power of our model with that of Vasicek model, our model is shown to perform better.

Pricing of the Eurodollar bank rate

The Eurodollar bank rate has been widely viewed as one of the chief barometers of credit market conditions in the Eurocurrency markets, yet not enough is known about how this rate is determined. For example, most of the short-to-medium term loans made by banks in the Eurocurrency market are floating rate loans linked to the London Interbank Offered Rate (LIBOR). The Eurocurrency interbank market “encompasses over 1,000 banks from 50 different countries, with a total market size of $3.3 trillion . . . transactions in U.S. dollars are the most prominent.. [13, p. 171. The objective of this paper is to attempt to further our understanding of the pricing of the Eurodollar bank rate through an analysis of recent Eurodollar bank rate movements. Empirical studies on determination of the Eurodollar bank rate [l, 7,11,12], generally have viewed the Eurodollar market as a major financial intermediary that channels short-term funds among the money markets of industrial countries. In these studies, the dollar-denominated risk-free rate of return (U.S. Treasury bill rate) is taken to be the principal determinant of the Eurodollar bank rate.’ Moreover, these studies anticipate that the maximum adjustment in the Eurodollar bank rate will be on a one-to-one basis to changes in the U.S. Treasury bill rate. Using both quarterly and monthly data for 1957-64, Hendershott estimated a stock-flow adjustment equation of the “Koyck-Nerlove” type. He concluded that, “in response to a one percentage point rise in the mean U.S. bill rate, . . . the eventual increase in the Eurodollar rate will be . . . 1.07 percentage points. This is not significantly greater than the maximum anticipated value of unity” [7, p. 4621. Using a multiple regression approach and monthly data for the period 1961-71, Argy and Hodjera [l] showed that the maximum value of the estimated coefficient on the U.S. Treasury bill rate is 0.62. Mills [12], using a similar approach and weekly data for 1966-70, showed that the maximum value is 0.61. In this paper the basic relationship between the Eurodollar bank rate and a dollar-denominated risk-free rate of return (the U.S. Treasury bill rate) is examined.

The pricing relationship of eurodollar futures and eurodollar deposit rates

The pricing relationship of eurodollar futures and eurodollar deposit rates

The term structure of Euro interest rates and rational expectations

This paper analyzes the short end of the maturity spectrum of Euro interest rates using recent monthly data. The data for the Euro franc and Euro DM interest rates support the (rational) expectations hypothesis, whereas those true for Euro dollar interest rates do not. This result is explained by the different approaches used to conduct monetary policy in the USA, Switzerland, and West Germany.

Covered interest parity and UK monetary ‘news’

In this note the effect of unanticipated sterling M3 announcements on the sterling-dollar covered interest parity relationship is investigated. It is demonstrated inter alia that unanticipated monetary announcements have a significantly positive effect on the one month euro-sterling interest rate, a significantly negative effect on the one month euro-dollar interest rate which in turn generates an expected exchange rate depreciation.

Interest Parity, Monetary Policy and the Volatility of Australian Short‐Term Interest Rates: 1978–1982*

The period since the introduction of the Treasury note tender in December 1979 has been characterized by increased variability of Australian short‐term interest rates. Using a methodology suggested by Evans, the increase in variability of the 90‐day commercial bill rate is decomposed into that attributable to domestic monetary policy, seasonal influences, covered international interest rate movements and other miscellaneous influences. The results suggest that after December 1979 Australian short‐term interest rates became more sensitive to surprises in the domestic monetary base, covered Eurodollar rate surprises and seasonal influences. Increased volatility of the covered Eurodollar rate also contributed to increased variance of domestic rates.

Interest rate harmonisation among selected industrial countries 1961(1)–1970(12)

A number of studies have examined international monetary integration during periods of fixed exchange rates and mobile capital. These studies have not only failed to reach a concensus but have been deficient in their treatment of serial correlation and lag structures. This paper highlights these two aspects and indicates the presence of considerable integration, the nature of which conforms with theory more satisfactorily over the period 1961(1)–1967(6) than over the period to 1970(12) usually taken as relevant. In contrast with much of the literature no lagged relationship is found to exist between the Eurodollar and US rates over this period. As expected, covered rates exhibit greater dependence upon external influences than uncovered.

Time Series Analysis of International Dollar Denominated Interest Rates

The yield levels and yield movements of Eurodollar rates are compared to yield levels and yield movements of similar U.S. securities. Contrary to the previous studies, we could find no consistent and meaningful lead-lag relationship between U.S. rates and Eurodollar rates. Additionally, we found that long-term Eurodollar rates are not determined by long distributed lag of short-term rates. With and without capital controls and despite increased liquidity and more information there exist difference in yield levels and yield movements.

Interest arbitrage in the Euro-currency markets

This study investigates how interest rates in the non-dollar Euro-currency markets are determined. Each of these Euro-currency rates is linked to the Euro-dollar rate through arbitrage operations undertaken by banks. Evidence from regressions of the Euro-currency rates on the Euro-dollar rate and the corresponding forward premium confirms that each non-dollar rate adheres closely to interest parity. Arbitrage results in unifying the Euro-currency markets so that supply and demand pressures in any individual market are spread throughout other Euro-currency markets. Because of the overwhelming size of the Euro-dollar market, conditions in this market tend to dominate conditions in the remaining Euro-currency markets.

Error-Learning in the Eurodollar Market

During the last 15 years, the Eurodollar deposit market has grown from perhaps $1 billion to a level now estimated to exceed $200 billion. This growth has prompted numerous arguments and investigations as to its cause [cf. 14, 22, 27], factors influencing it [cf. 24, 28, 29, 32], its import for U.S. banking and monetary policy [cf. 2, 38], its role in international financial market integration [cf. 1, 9, 39], and its impact on the internationalization of U.S. monetary policy [cf. 18, 23]. Over this same period of time, an increasing empirical interest has developed in the term structure of interest rates. Yet most empirical studies of the Eurodollar market [cf. 2, 28, 29, 32] have employed the 90-day Eurodollar CD rate as though it were “the rate of interest” in this market. This tendency has resulted more from the empirical ease of computing covered interest differentials in conjunction with the three–month forward exchange rate than from theoretical considerations [cf. 32, p. 7].

THE STRUCTURE OF INTERNATIONAL INTEREST RATES: THE U.S. TREASURY BILL RATE AND THE EURODOLLAR DEPOSIT RATE

A NUMBER OF INVESTIGATORS have recently reported estimates of the sensitivity of short-term international capital movements to international interest rate differentials [1], [4], [7]. While the wide range of their estimates indicates a need for further estimation of this sensitivity, the present study extends the investigation into a closely related area. Even if the relationship between short-term capital flows and interest rate differentials were known with certainty, this knowledge by itself would not allow computation of the net impact of changes in U.S. short-term interest rates on the capital flows. The relationship between relevant pairs of U.S. and foreign short-term interest rates is also needed. Since a recent attempt to explain U.S. private short-term capital outflows suggests a very large sensitivity in these flows to the U.S. Treasury bill rate and the Eurodollar deposit rate, the relation between these rates is investigated in this paper.' The paper is divided into theoretical and empirical sections. The theoretical relationship between the interest rates derived in Section I is based on part of George Horwich's recent theoretical analysis [3]. A flow model of the Eurodollar market is developed in which the suppliers of Eurodollar deposits are analyzed as financial intermediaries and the U.S. bill rate is taken to be the principal determinant of the Eurodollar rate. The model greatly simplifies the complex structure of the Eurodollar market, but the basic character of the market is retained. Stock-flow considerations suggest that the Eurodollar deposit rate adjusts gradually to changes in the U.S. bill rate. In the empirical