Synchronization and nonlinear interdependence of short-term interest rates:

Mohamed El Hedi Arouri (1, 2) , F. Jawadi (1, 3) , Duc Khuong Nguyen (3)

1 EconomiX - EconomiX
2 LEO - Laboratoire d'économie d'Orleans [2008-2011]
3 CERAG - Centre d'études et de recherches appliquées à la gestion

In this paper we investigate the synchronization and nonlinear adjustment process of short-term interest rates for France, the US and the UK using the bi-directional feedback measures proposed by Geweke (1982).and appropriate smooth transition error-correction models (STECM). We find strong evidence of continual increases in bilateral synchronization of these interest rates from 2005 to 2009 as well as of their lead-lag causal interactions with a slight dominance of the US rate. Consistently, exogenous shifts in the US rate are found to lead those in France and the UK within a very short time spans from one to two days. Results from nonlinear modeling indicate that short-term interest rates converge towards a common equilibrium in the long-run in a nonlinear manner in that their time dynamics exhibit regime-switching behavior.

Domaines: Econométrie de la finance [q-fin.ST]

Mohamed El Hedi Arouri, F. Jawadi, Duc Khuong Nguyen. Synchronization and nonlinear interdependence of short-term interest rates:. 2010. ⟨hal-00507820⟩