Volatility of Interest Rates in the Euro Area: Evidence from High Frequency Data

74 Pages Posted: 2 Dec 2003

See all articles by Nuno Cassola

Nuno Cassola

University of Milan Bicocca - CefES; University of Lisbon - CEMAPRE

Claudio Morana

Università di Milano Bicocca; Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS); Università degli Studi di Milano-Bicocca - Center for European Studies (CefES); Center for Economic Research on Pensions and Welfare Policies (CeRP); University of Bologna - Rimini Center for Economic Analysis (RCEA)

Date Written: June 2003

Abstract

This paper estimates the factors underlying the volatility of the euro overnight interest rate and its transmission along the euro area money market yield curve. A new multivariate unobserved components model is proposed allowing for both long-memory and stationary cyclical dynamics. Using hourly data the estimates show repetitive intradaily and monthly patterns that can be explained by the microstructure of the money market and the institutional features of the Eurosystem's operational framework for monetary policy implementation. Strong persistence is detected in all log-volatility processes and two common long-memory factors are extracted. The first factor explains the long-memory dynamics of the shortest maturity. The second factor explains the transmission of volatility along the money market yield curve. We find evidence that most liquidity effects are cyclical, confined to the end of reserve maintenance periods, and are not transmitted along the money market yield curve.

Keywords: Money market microstructure; money market interest rates; liquidity effect; stochastic volatility; fractional integration and cointegration

JEL Classification: C32, E43, F30, G10

Suggested Citation

Cassola, Nuno and Morana, Claudio, Volatility of Interest Rates in the Euro Area: Evidence from High Frequency Data (June 2003). Available at SSRN: https://ssrn.com/abstract=457302

Nuno Cassola (Contact Author)

University of Milan Bicocca - CefES ( email )

Milan
Italy

University of Lisbon - CEMAPRE ( email )

Lisbon
Portugal

Claudio Morana

Università di Milano Bicocca ( email )

Dip Economia Metodi Quantitativi Strategie Impresa
Piazza dell'Ateneno Nuovo 1
Milano, 20126
Italy
+39 0264483091 (Phone)

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milan, 20126
Italy

Università degli Studi di Milano-Bicocca - Center for European Studies (CefES) ( email )

U6 Building
Viale Piero e Alberto Pirelli, 22
Milano, 20126
Italy

Center for Economic Research on Pensions and Welfare Policies (CeRP) ( email )

Moncalieri, Turin
Italy

University of Bologna - Rimini Center for Economic Analysis (RCEA) ( email )

Via Patara, 3
Rimini (RN), RN 47900
Italy

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
181
Abstract Views
1,320
rank
193,608
PlumX Metrics