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Purpose This paper aims to briefly review the literature on interest rate convergence and the European debt crisis with a special focus on the current fiscal problems of some governments in Europe. Design/methodology/approach Relevant empirical papers are identified and reviewed focusing on time series analysis techniques. Findings The introduction of the euro has caused interest rate convergence among European Monetary Union (EMU) government bond yields. However, now sovereign credit risk and possibly even redenomination risk have caused divergences in European bond markets. Research limitations/implications A major limitation is that a relatively new field of the literature is surveyed. However, there are enough papers of relevance. This review paper could therefore be helpful in finding new approaches for additional empirical research examining the EMU bond market. Originality/value The results of empirical studies in a relatively new field of the literature are summarized. There meanwhile are some relevant papers. A brief survey of the results of these papers is provided. Important empirical findings with regard to interest rate convergence, sovereign credit risk and redenomination risk in the EMU are discussed and evaluated. The review is especially helpful for researchers and practitioners in the field of managerial finance and risk managers in the financial services industry.

Abstract:As the future movements of financial time series like the European Central Bank's benchmark rate are exposed to uncertainty, financial market participants regularly have to rely on professional analysts' forecasts. Not surprisingly-and for decades already-the quality of survey forecasts has been evaluated, with heterogeneous results. In addition, forecasters' performance can change through the course of time. This may happen not only due to wrong or inadequate underlying models. Especially in times of financial turmoil or monetary crisis-like the European debt crisis-the interest rate moves made by central bankers may become even harder to predict (at least the direct reaction to the crisis). Because of this, we evaluate the performance of survey forecasts for the three months rate in the Euro zone performed by financial professionals and test for structural breaks to evidence for crisis related changes and the corresponding forecast errors.

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Investors frequently rely on forecasts published by professional analysts. During the financial crisis uncertainty has substantially risen. Not surprisingly experts' predictions should be more than welcome for decision makers. After modelling the long-term relationship between the three month EURIBOR and the Consensus Economic forecast by using co-integration analysis this paper tests for changes in the accuracy of forecasts for the three month EURIBOR. We use traditional evaluation methods like sign accuracy tests, turning point analysis and the root mean square error (RMSE). We find evidence for a crisis related structural break. Checking for quality changes it can be stated that the forecasters' accuracy after the first months of the crisis is not much better in general. Furthermore, neither before nor after the structural break the analysts' forecasts did outperform a random prediction. But it can at least be stated that there is a significant improvement in the turning point prediction.