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The Effect of Changes in the Funding Rate on Market Interest Rates: The Swedish Case

Thorburn, Charles (2006)
Department of Economics
Abstract
Understanding the effect of central bank policy actions on asset prices is important both to central banks in estimating the welfare effects of their actions and to individual investors in making correct decisions. Studies of these effects have been made predominantly on the U.S. market. This paper will investigate the direct effect of an unexpected change in the main Swedish funding rate on Swedish market interest rates. Data on the funding rate, interbank rate and market interest rates are used in regressions quantifying this effect. The unexpected part of a change in the funding rate is isolated using the one month Swedish interbank rate. The results indicate that an unexpected rate cut or hike causes a decrease or an increase in the... (More)
Understanding the effect of central bank policy actions on asset prices is important both to central banks in estimating the welfare effects of their actions and to individual investors in making correct decisions. Studies of these effects have been made predominantly on the U.S. market. This paper will investigate the direct effect of an unexpected change in the main Swedish funding rate on Swedish market interest rates. Data on the funding rate, interbank rate and market interest rates are used in regressions quantifying this effect. The unexpected part of a change in the funding rate is isolated using the one month Swedish interbank rate. The results indicate that an unexpected rate cut or hike causes a decrease or an increase in the market rates respectively. The expected part of a funding rate change is found to be largely insignificant. The conclusion is that there is evidence of an announcement effect and that the Swedish interest rate markets are not proven inefficient. (Less)
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@misc{1336295,
  abstract     = {Understanding the effect of central bank policy actions on asset prices is important both to central banks in estimating the welfare effects of their actions and to individual investors in making correct decisions. Studies of these effects have been made predominantly on the U.S. market. This paper will investigate the direct effect of an unexpected change in the main Swedish funding rate on Swedish market interest rates. Data on the funding rate, interbank rate and market interest rates are used in regressions quantifying this effect. The unexpected part of a change in the funding rate is isolated using the one month Swedish interbank rate. The results indicate that an unexpected rate cut or hike causes a decrease or an increase in the market rates respectively. The expected part of a funding rate change is found to be largely insignificant. The conclusion is that there is evidence of an announcement effect and that the Swedish interest rate markets are not proven inefficient.},
  author       = {Thorburn, Charles},
  keyword      = {reporänta,riksbank,central bank,funding rate,announcement effect,STIBOR,Economics, econometrics, economic theory, economic systems, economic policy,Nationalekonomi, ekonometri, ekonomisk teori, ekonomiska system, ekonomisk politik},
  language     = {eng},
  note         = {Student Paper},
  title        = {The Effect of Changes in the Funding Rate on Market Interest Rates: The Swedish Case},
  year         = {2006},
}