Determinants of the <scp>EONIA</scp> Spread and the Financial Crisis

Soares, Carla; Rodrigues, Paulo M. M.

doi:10.1111/manc.12010

Cited by 19 publications

(19 citation statements)

References 30 publications

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“…The mean of the spread between the unsecured and secured 3‐month rate increased from 6.7 to 56.6 bp by 745 per cent and the variance jumped by a factor of 878; for the 6 months tenor the respective values are 830 per cent and a factor of 1257. Soares and Rodrigues () provide evidence that the ECB faced greater challenges in steering the spread between EONIA and the minimum bid rate; their results suggest that longer tenors of OMOs, full allotment and quick tenders contributed to stabilizing money market conditions. It is questionable whether the spreads between the unsecured and the secured money market rates will return to pre‐crisis levels in the foreseeable future.…”

Section: The Impact Of the Current Crisis On The Implementation Of Momentioning

confidence: 99%

The Impact of the Liquidity Coverage Ratio (LCR) on the Implementation of Monetary Policy

Schmitz

2013

Economic Notes

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In addition to revamping existing rules for bank capital, Basel III introduces a new global framework for liquidity regulation. One part of this framework is the Liquidity Coverage Ratio (LCR), which requires banks to hold sufficient high-quality liquid assets to survive a 30-day period of market stress. As monetary policy typically involves targeting the interest rate on loans of one of these assets-central bank reserves-it is important to understand how this regulation may impact the efficacy of central banks' current operational frameworks. We extend a standard model of monetary policy implementation in a corridor system to include term funding and an LCR requirement. When banks face the possibility of an LCR shortfall, we show that it becomes more challenging for a central bank to control the overnight interest rate and that the very short end of the yield curve becomes steeper. These results suggest that central banks may want to adjust their operational frameworks as the new regulation is implemented. JEL classification: E43, E58, G28

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Section: The Impact Of the Current Crisis On The Implementation Of Momentioning

confidence: 99%

The Impact of the Liquidity Coverage Ratio (LCR) on the Implementation of Monetary Policy

Schmitz

2013

Economic Notes

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“…While this spread was mostly transitory before 2007, persistent deviations appeared in October 2008, following changes in the monetarypolicy implementation in the euro area in response to the financial crisis. To capture that change in the behaviour of the EONIA spread, an additional two-state Markovswitching process is introduced, one of these two states corresponding to a situation in which banks' excess liquidity translates into a drop of the interbank rate with respect to the target (see Soares and Rodrigues, 2011).…”

Section: Introductionmentioning

confidence: 99%

A model of the euro-area yield curve with discrete policy rates

Renne

2017

Studies in Nonlinear Dynamics &Amp; Econometrics

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This paper presents a no-arbitrage yield-curve model that explicitly incorporates the central-bank policy rate. This model is consistent with the existence of a lower bound for nominal interest rates, which makes it particularly relevant in the current context of extremely low interest rates. Changes in the policy rates depend on the monetary-policy phase, that can be either in an easing, status quo or tightening mode. The estimation of the model, based on daily euro-area yield data, reveals the strong influence of the monetary-policy phases on the shape of the yield curve. This relationship can, in turn, be exploited to estimate the probabilities of being in the different monetary-policy phases. The model is also used to compute term premiums, that are the parts of the yields reflecting the aversion of investors to interest rate risk. The results point to the existence of statistically significant premiums for many dates, even for short horizons.

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“…persistent deviations appeared in October 2008, following changes in the monetarypolicy implementation in the euro area in response to the financial crisis. To capture that change in the behaviour of the EONIA spread, an additional two-state Markovswitching process is introduced, one of these two states corresponding to a situation in which banks' excess liquidity translates into a drop of the interbank rate with respect to the target (see Soares and Rodrigues, 2011).…”

Section: Introductionmentioning

confidence: 99%

A Model of the Euro-Area Yield Curve with Discrete Policy Rates

Renne

2012

SSRN Journal

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This paper presents a no-arbitrage model of the yield curve that explicitly incorporates the central-bank policy rate. After having estimated the model using daily euro-area data, I explore the behaviour of risk premia at the short end of the yield curve. These risk premia are neglected by the widely-used practice that consists in backing out market forecasts of future policy-rate moves from moneymarket forward rates. The results suggest that this practice is valid in terms of sign of the expected target moves, but that it tends to overestimate their size. As an additional contribution, the model is exploited to simulate forward-guidance measures. A credible commitment of the central bank to keep its policy rate unchanged for a given period of time can result in substantial declines in yields. For instance, a central-bank commitment to keep the policy rate at 1% over the next 2 years would imply a decline in the 5-year rate of about 25 basis points.JEL codes: E43, E44, E47, E52, G12.Résumé : Cet article présente un modèle de la structure par termes des taux d'intérêt dans lequel le taux directeur de la banque centrale est explicite. Le modèle, estimé sur données relatives à la zone euro, permet l'étude du comportement de primes de risque présentes dans la partie courte de la courbe des taux. Ces primes de risques sont généralement négligées par la pratique considérant que les taux à terme peuvent être interprétés comme les anticipations de marché des taux de politique monétaire futurs. Les résultats suggèrent que cette pratique est valide en termes de direction des mouvements anticipés du taux directeur mais qu'elle tend à surestimer l'amplitude de ces variations. Le modèle est également utilisé pour simuler l'impact d'un engagement de la banque centrale concernant la trajectoire future de son taux directeur. Ce type de mesure peut avoir une influence substantielle sur la courbe des taux d'intérêt: un engagement crédible de la banque centrale à maintenir son principal taux directeur à un niveau de 1% au cours des deux prochaines années entraînerait une baisse du taux à 5 ans de 25 points de base.Codes JEL : E43, E44, E47, E52, G12.Mots-clés : modèle de la structure par termes des taux d'intérêt; limite zéro; changement de régime; engagement concernant la trajectoire future du taux de politique monétaire. for models of the U.S. Federal Funds rate target. 2 The existence of such risk premia in the short end of the euro-area yield curve has notably been evidenced by Durré, Evjen and Pilegaard (2003).3 This common market practice implicitly assumes that the expectation hypothesis holds at the short-end of the yield curve.

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Determinants of the EONIA Spread and the Financial Crisis

Cited by 19 publications

References 30 publications

The Impact of the Liquidity Coverage Ratio (LCR) on the Implementation of Monetary Policy

The Impact of the Liquidity Coverage Ratio (LCR) on the Implementation of Monetary Policy

A model of the euro-area yield curve with discrete policy rates

A Model of the Euro-Area Yield Curve with Discrete Policy Rates

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