Commercial Paper Market as a Forward-Looking Component for EURIBOR Interest Rates During the COVID-19 Pandemic

In the new hybrid methodology the calculation of EURIBOR benchmark reference rates should be grounded in fully comprehensive euro money market transactions. We analyze the role of financial corporate paper (CP) market in the development of EURIBOR interest rates by applying a DCC-GARCH framework to the parallel shifts of the yield spreads between these two markets, using daily data from the European Commercial Paper market between May 6th, 2019 and March 9th, 2021. According to our results, during ‘normal’ times the term structures of these markets are strongly positively connected but during the periods of financial stress, like at the onset of COVID-19 crisis, their dependence inverts to a negative one, and this relationship continues to hold regardless of the distinct impact of the ECB’s quantitative easing during the crisis. As the extreme volatility of the CP interest rates during the COVID-19 turmoil is not directly transmitted to the EURIBOR rates, the CP markets do not provide a constant backup for the EURIBOR markets through all market conditions