Causal linkages between US and Eurodollar interest rates: further evidence

Abstract

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 Transmission in the World Money Markets

“…Examination of the figure shows that there is a high degree of integration between each internal market and corresponding LIBOR market. We find two‐way causality between ($ CD, $ LIBOR), which is consistent with the latter subperiod findings of Fung and Isberg (1992), Chan and Lee (1996), and Yang et al . (2007), and between (¥ CD, ¥ LIBOR), which is consistent with the latter subperiod findings of Lo et al .…”

“…. ', thus it is not necessary to be concerned with structural breaks as are Yang et al (2007) who study a much longer 20-year time period. 8 Before one can test for cointegration, it must first be verified that each series has a unit root.…”

“…Yang et al . (2007) use daily 3‐month US dollar CD rates and Eurodollar deposit rates to examine causal linkages between domestic and offshore US dollar interest rates during the 1983–2002 period and two subperiods.…”

“…7 7 We note, as do Wang et al . (2007) who study an overlapping period, that ‘ … there are no publicly identifiable events which can conceivably affect the interest rate linkages … ’, thus it is not necessary to be concerned with structural breaks as are Yang et al . (2007) who study a much longer 20‐year time period. …”