Information Transmission in the World Money Markets

Abstract

Using 1,966 daily observations since the introduction of the euro, we apply cointegration and error correction tests to examine information transmission in the major world money markets as represented by the domestic CD markets and the Eurocurrency market for the US dollar, euro, Japanese yen, and British pound sterling. Our inter-market tests show a high degree of integration and interdependency among inter-market interest rates. Our intra-market results show that $ LIBOR and LIBOR rates drive LIBOR and £ LIBOR. Application of Johansen's (1988) multivariate test procedure and Gonzalo and Granger's (1995) long-memory components technique confirms and reinforces our intramarket findings that the system of four LIBOR rates is fully integrated (i.e., three cointegrating vectors), with the single common trend driven by $ LIBOR and LIBOR. These results are consistent with the strength of the dollar and yen relative to the pound sterling and the euro during the developing world financial crisis in late 2008.

Dynamic Relations between Stock Returns and Exchange Rate Changes

“…Therefore, we anticipate finding a stronger contemporaneous and dynamic relation using recent sample periods and extensive data. Indeed, our findings based on sub‐sample analyses confirm the findings of Griffin and Stulz () for the early sub‐sample, but they provide a stronger contemporaneous link for the recent sub‐sample, consistent with Resnick and Shoesmith (), whose inter‐market tests show a high degree of integration and interdependency in euro currency markets.…”