The Euribor Futures Market: Efficiency and the Impact of ECB Policy Announcements

Abstract

For an effective and smooth monetary policy, it is important that interest rate expectations are in line with central bank policy intentions. The predictability of money market interest rates is, therefore, an indicator of transparency and clarity in the communication of monetary policy and of the effectiveness of monetary policy implementation.In this paper, we analyse three aspects of the predictability of money market rates in the European Monetary Union (EMU). The first is the efficiency of the three-month Euribor interest rate futures markets. The second aspect is the effect of ECB policy announcements on the volatility of Euribor futures rates, and the third aspect is the effect of ECB policy announcements on the prediction error contained in Euribor futures rates. We find that the new Euro money markets were able to predict short-term rates well. Our results suggest that the ECB communication of monetary policy has worked well during the first years of EMU and that the predictability of ECB policy decisions seems to have improved over

European Monetary Policy Surprises: The Aggregate and Sectoral Stock Market Response

“…With the introduction of the euro in January 1999, we proxy surprise changes in the ECB policy rate by the one-day change in the threemonth Euribor futures rate. Bernoth and Von Hagen (2004) find that the three-month Euribor futures rate is an unbiased predictor of Euro area policy rate changes. 8…”

Communication, Transparency, Accountability: Monetary Policy in the Twenty-First Century

“…5 Empirical tests show that, with regard to the predictability of its decisions, the ECB's communication policy will easily stand up to any comparison (see, for example, Gaspar, Pérez-Quirós, and Sicilia, 2001;Bernoth and von Hagen, 2004;and Bank for International Settlements, 2004, p. 86;also, Poole and Rasche, 2003, provide evidence regarding the Federal Reserve). 6 The term "minutes," per se, directly implies transparency and authenticity regarding the course of a meeting.…”

Does it Pay to Watch Central Bankers’ Lips? The Information Content of ECB Wording

“…Kohn and Sack (2003) find that the Federal Reserve also influences short-and long-term interest rates with different communication devices. The effect of ECB policy announcement on Euribor futures market rates seems to be small (Bernoth and von Hagen, 2004). Studies related to the impact of communication on exchange rates are Fratzscher (2004), Jansen and de Haan (2004b), or Beine and Lecourt (2004).…”