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What will be the risk-free rate and benchmark yield curve following European monetary union?

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  • Chris Brooks
  • Frank Skinner

Abstract

Using a linear factor model, we study the behaviour of French, Germany, Italian and British sovereign yield curves in the run up to EMU. This allows us to determine which of these yield curves might best approximate a benchmark yield curve post EMU. We find that the best approximation for the risk free yield is the UK three month T-bill yield, followed by the German three month T-bill yield. As no one sovereign yield curve dominates all others, we find that a composite yield curve, consisting of French, Italian and UK bonds at different maturity points along the yield curve should be the benchmark post EMU.

Suggested Citation

  • Chris Brooks & Frank Skinner, 2000. "What will be the risk-free rate and benchmark yield curve following European monetary union?," Applied Financial Economics, Taylor & Francis Journals, vol. 10(1), pages 59-69.
    • Handle: RePEc:taf:apfiec:v:10:y:2000:i:1:p:59-69
    DOI: 10.1080/096031000331932
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    References listed on IDEAS

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    1. Rao, Ramesh K. S., 1982. "The Impact of Yield Changes on the Systematic Risk of Bonds," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 17(1), pages 115-127, March.
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    7. Jean-Claude Cosset & Jean Roy, 1991. "The Determinants of Country Risk Ratings," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 22(1), pages 135-142, March.
    8. Jarrow, Robert A, 1978. "The Relationship between Yield, Risk and Return of Corporate Bonds," Journal of Finance, American Finance Association, vol. 33(4), pages 1235-1240, September.
    9. T. S. Breusch & A. R. Pagan, 1980. "The Lagrange Multiplier Test and its Applications to Model Specification in Econometrics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 47(1), pages 239-253.
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    Cited by:

    1. Keshab Bhattarai, 2008. "An empirical study of interest rate determination rules," Applied Financial Economics, Taylor & Francis Journals, vol. 18(4), pages 327-343.
    2. C. Emre Alper & K. Kazimov & A. Akdemir, 2007. "Forecasting the term structure of interest rates for Turkey: a factor analysis approach," Applied Financial Economics, Taylor & Francis Journals, vol. 17(1), pages 77-85.

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