Abstract
Global markets have become more integrated, making co-movements of international interest rates possible. In this paper, we investigate the causal linkage between US and Eurodollar (London) interest rate using the Granger causality test in quantiles. This permits us to examine causality over interest rate distributions not covered by the usual causality test. We therefore test causality in different quantile ranges. A common attribute with previous studies that investigate the causal linkages among interest rates across international money markets is the assumption that the causal relations between international interest rate changes are constant across different interest rate levels. In this study, we allow for asymmetric quantile causal effects. Our empirical results suggest a quantile causal effect between US interest rate and Eurodollar interest rate. US interest rate Granger cause Eurodollar interest rate. The effect is positive at lower quantiles and negative at upper quantiles. On the other hand, Eurodollar interest rate Granger cause US interest rate, but the effect is negative at the lower quantile and positive at the upper quantile. The estimated causality coefficients at both the lower and the higher quantiles are significantly different from the median coefficients.
| Original language | English |
|---|---|
| Pages (from-to) | 200-210 |
| Number of pages | 11 |
| Journal | Journal of Economics and Finance |
| Volume | 45 |
| Issue number | 1 |
| DOIs | |
| State | Published - Jan 1 2021 |
Keywords
- Eurodollar interest rate
- Granger causality
- Quantile regression
- US interest rate
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