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 modeled 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, theoretical 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 modeling and macro-economic based Expectations Hypothesis Approach