Common Factors in Eurocurrency Rates: A Dynamic Analysis

The paper explores the issue of integration in the Eurocurrency market. In particular, by using information from the short end of the Eurodollar, Euromark and the Eurosterling term structures we focus on their multivariate correlation structure decomposing it into common (systemic) and idiosyncratic components. The empirical analysis employs the Johansen Multivariate Cointegration methodology and the Principal Components Analysis in order to test for the presence of any dynamic common factors among the selected Eurocurrency interest rates. The findings provide evidence in favour of an integrated market.