Commercial Paper Markets in the Benchmark Reform for EURIBOR Rates : Effective Lower Bound Era

In the new Benchmark Determination Methodology (BDM), the calculation of Euro Interbank Offered Rates (EURIBOR) should be based on fully comprehensive euro unsecured money market transactions. As this set of eligible transactions contains a number of different instruments, it cannot be ascertained a priori which instruments will contribute to the final rates submitted by Panel Banks at each defined tenor on a given day. This paper studies the role of the financial Commercial Paper (CP) markets as a component in this hierarchical approach. By analyzing the dependency between the corresponding slopes of the CP and EURIBOR markets, our results indicate that they are dynamically connected through bond risk premia and hedging of maturity-specific demand risks. The European Central Bank’s (ECB) response to the COVID-19 pandemic and the 2022 inflation surge also influence our results. The finding that the EURIBOR rates reflect Panel Banks’ wholesale borrowing costs strengthens the integrity of these benchmark rates, as cases of misconduct in Panel Banks’ derivatives portfolios motivated the reform