Scandinavian Working Papers in Economics

Research Papers in Economics,
Stockholm University, Department of Economics

No 2008:5: The Sources of Volatility Transmission in the Euro Area Money Market: From Longer Maturities to the Overnight?

Paolo Zagaglia ()
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Paolo Zagaglia: Dept. of Economics, Stockholm University, Postal: Department of Economics, Stockholm University, S-106 91 Stockholm, Sweden

Abstract: This note investigates the transmission of volatility from longer maturities to the overnight segment of the Euro area money market. I use non-parametric estimates of the daily variance of swap rates to test for block exogeneity with respect to the overnight. The results suggest that there exists transmission of volatility shocks from the 1-year swap rate to the overnight market. The reform of the operational framework of March 2004 has improved the segmentation of the market, as it has insulated the overnight segment from spillovers in volatility stemming from swap rates up to 6 months of maturity.

Keywords: Money Market; High-Frequency Data; Granger Causality

JEL-codes: C22; E58

9 pages, May 22, 2008

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