Comparing different methods for the estimation of interbank intraday yield curves

Abstract

In this study, we compare three different models, namely, the Nelson–Siegel model (NSM), the Svensson model (SVM), and the Diebold–Li model (DLM), for the estimation of an intraday yield curve on the Italian interbank credit market e‐MID. Using a sample, which spans from October 2005 until March 2010, the first important finding is that all three models are highly suitable for the estimation of an intraday yield curve providing superior empirical results when compared with similar works on e‐MID. The second important finding is that, based on different in‐sample statistics, the SVM dominates the other two models before, during, and after the financial crisis from 2007. Moreover, the NSM seems to dominate the DLM although these differences in goodness‐of‐fit between these two models may not be statistically significant. Our findings are of high practical importance from different perspectives regarding interbank credit markets, including the better understanding of trading processes, the optimization of banks' trading strategies, and monetary policy implications. Finally, our findings can be seen as the starting point for further analyses in this research area.

Electronic Trading and Financial Crisis Effects in the e-MID Interbank Market: A Multivariate Multiplicative Error Model Analysis

“…However, during financial crises and heightened risks, this Pareto optimum breaks down. These changes may signal deficiencies in the e-MID and potential market failures or inefficiencies during and after financial crises, aligning with observations made by other researchers (e.g., Porzio et al, 2009;Jeleskovic & Demertzidis, 2020;Demertzidis & Jeleskovic, 2021).…”

Interbank Transactions on the Intraday Frequency: “Different Market States and the Effects of the Financial Crisis

“…As seen in section two of this paper, the majority of studies base their analysis of the intraday behavior of the key variables on hourly means. Here, I differentiate my analysis also from a methodological point: I follow Beaupain and Durré (2008) and Jeleskovic and Demertzidis (2018) and use 30-minute intervals of the different variables during the day. As the authors state, the findings using means on a higher, but not too high frequency, leads to the point where the results become more precise, and the practical relevance on a lower time scale becomes even higher.…”

“…That is the reason why in many different studies, the market conditions are compared, before, during, and after this financial crisis (see e.g. Gabbi et al, 2012, Jeleskovic andDemertzidis, 2018). A major literature string focuses on the network formations of the e-MID market in the intraday frequency.…”

“…Until that point, all models were based on linear regressions. Demertzidis and Jeleskovic (2016) and Jeleskovic and Demertzidis (2018) used nonlinear models for the estimation of the spot intraday yield curve (SIYC) and argued that one has to move away from the assumption of a linear intraday interest rate, which becomes even more feasible after the outbreak of the crisis (for further details see Appendix A).…”

“…Furthermore, these variables, also on the intraday frequency, play an important role in further empirical econometric analyses. For example, Demertzidis and Jeleskovic (2016) and Jeleskovic and Demertzidis (2018) show that estimating an intraday yield curve generates better results when the number of transactions and the volume of transactions within the day can be considered as high. Therefore, findings in this research could be used from a methodological point of view for further studies using e.g.…”