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The French-German Interest Rate Differential Since German

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Author Info
Jerome Henry (ECB)
Jens Weidmann (Bundesbank)

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Abstract

We investigate the consequences of the 1992-1993 EMS crises, which resulted in the widening of the exchange rate bands, on the long-run linkages between the daily 1-month-Eurorates on German Mark, US-Dollar and French Franc. First, within a Gaussian VAR, both the US Eurorate and the French-German Eurorate differential are found stationary between December 1990 and December 1993. Second, using various GARCH models to account for heteroskedasticity show that Gaussian models can be misleading as to the interpretation of the linkages. Third, the estimated variance parameters are stable and the July 1993 episode is not linked to especially high a volatility. Finally, focusing on the French rate, we find asymmetry in the stochastic volatility, positive shocks being more persistent.

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Publisher Info
Paper provided by EconWPA in its series International Finance with number 0503009.

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Length: 40 pages
Date of creation: 30 Mar 2005
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Handle: RePEc:wpa:wuwpif:0503009

Note: Type of Document - pdf; pages: 40. Has appeared as: University of Bonn (SFB303), Discussion Paper No. B-295
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Related research
Keywords: Interest rates; cointegration; heteroskedasticity; GARCH; EMS; Asymmetry in the ERM;

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Find related papers by JEL classification:
F3 - International Economics - - International Finance
F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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    Other versions:
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  8. Juan Ayuso & M.P. Jurado & Fernando Restoy, 1994. "Is Exchange Rate Risk Higher in the E.R.M. after the Widening of Fluctuation Bands?," Banco de España Working Papers 9419, Banco de España.
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  18. Gonzalo, Jesus, 1994. "Five alternative methods of estimating long-run equilibrium relationships," Journal of Econometrics, Elsevier, vol. 60(1-2), pages 203-233. [Downloadable!] (restricted)
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