Empirical estimation of intraday yield curves on the Italian interbank credit market e-MID

This paper introduces a major novelty: the empirical estimation of spot intraday yield curves based on tick by tick data on the Italian electronic interbank credit market (e-MID). To analyze the consequences of the recent financial crisis, we split the data into four periods which include events before, during, and after the recent financial crisis starting in 2007. Our first result is that, from a practical point of view, the intraday yield curve can be modeled by standard models for yield curves providing advantages for intraday trading on intraday interbank credit markets. Moreover, the estimates show that the systematic dynamics in the intraday yield curves during the turmoil was highly noticeable, resulting in the significantly better goodness-of-fit. Based on this fact, we infer that investors in the interbank credit market base their investment decisions on the effects of the intraday dynamics of intraday interest rates more intensively during a financial crisis. Our explanation for this is that during a turmoil the process of incoming news may be more frequent and more intensive so that traders must update their trading strategies more often and more radically. Due to this, the systematic impact on e-MID appears to be stronger and econometric modeling of the intraday interest rate curve becomes even more attractive. In the future, this fact and the observation of similar intraday dynamics of intraday yield curves can be used as a potential indicator of financial crises.