An Empirical Analysis of Yield Curves across Euro and Non-Euro Countries Using Interbank Interest Rates

This paper studies the interrelations among yield curve factors, market expectations and monetary policy rates using interbank interest rates across Euro- and non-Euro countries. The term structure of interest rates can be summarized by the level and slope factor, whereas curvature is not a common feature of interbank rates. Interest rates are first modelled in an equilibrium framework using a two-factor CIR (1985) model, and Kalman filter is used to extract the two factors under the no–arbitrage restriction. Impulse response analysis shows that German factors and forecast errors have the biggest influence on those factors from other markets, and that yield slope is a useful variable for capturing market expectations. Based on the estimated factors, theoretcial yields implied by the Expectations Hypothesis match remarkably well the movements of monetary policy rates, providing a consistent link between yield curve factors and macro–economic variables and thus integrating the approaches between no–arbitrage yield curve modelling and macro–economic based Expectations Hypothesis