The Role of Eonia in the Dynamics of Short-Term Interbank Rates

  • José Carlos Vides University of Huelva, Department of Economics, (Spain)
  • Antonio A. Golpe University of Huelva, Department of Economics and Centro de Estudios Avanzados en Física, Matemáticas y Computación (Spain)
  • Jesús Iglesias University of Seville, Department of Financial Economics and Operations Management (Spain))

Abstract

To signal monetary policies and market expectations, we apply a fractionally cointegrated vector autoregressive (FCVAR) model, aiming to analyse the expectations hypothesis of term structure (EHTS), persistence in the European OverNight Index Average (Eonia) spread and permanent-transitory decomposition using a novel approach. We use a monthly frequency sample for the 3-month Euribor rate and Eonia rate, covering the period from January 1999 to February 2019. The results obtained confirm the EHTS and show evidence of a high persistence of the spread, which means that shocks may impede effectiveness in monetary policy and that the European Central Bank (ECB) loses control over interest rates. Additionally, according to permanent-transitory decomposition, we determine that the Eonia rate has a permanent component and thus dominates the common trend in the cointegration system. In sum, if the ECB wants to keep the interbank market interest rates under control, it must contemplate the evolution of the Eonia rate. 
Keywords: Eonia rate, Long memory and fractional cointegration, Euribor rate, Persistence of interest rates, Permanent-transitory decomposition.
JEL: C22, E52, G15


 

How to Cite
Vides J.C., Golpe A.A., & Iglesias J. (2019). The Role of Eonia in the Dynamics of Short-Term Interbank Rates. Panoeconomicus, Advance online publication, 1-20. doi:10.2298/PAN171004018C
Section
Original scientific paper