Euro LIBOR rates: technical predictability overview

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Written by Forex Automaton   
Wednesday, 08 October 2008 16:42
Article Index
Euro LIBOR rates: technical predictability overview
LIBOR Volatility
LIBOR autocorrelations
LIBOR Cross-correlations
All Pages

The motivation for the technical, mostly correlation-based study of LIBORs was outlined in the USD LIBOR article. Forex correlation analysis made me believe that LIBORs are important for speculative forex forecasting. From a more academic standpoint, it is interesting to hone one's analytic skills by expanding the range of application of the correlation techniques which yield intriguing results in forex to what's behind the forex movements, namely to the interest rates. I've structured this document to begin with historical LIBOR charts for Euro, continue with volatility analysis, culminate with LIBOR autocorrelations which is my prime tool of predictability analysis and conclude with cross-correlations among Euro LIBORs of different maturity terms.

LIBOR charts

History of s/n-o/n EUR LIBOR 2002-2008 History of 1 week EUR LIBOR 2002-2008 History of 1-month EUR LIBOR 2002-2008 History of 3-month EUR LIBOR 2002-2008 History of 12-month EUR LIBOR 2002-2008

Fig.1: Historical EUR LIBOR rates charts, top to bottom: s/n-o/n, 1-week, 1-month, 3-month and 12-month. Time axis is labeled in MM-YY format.

As far as the overnight LIBOR is concerned, the money markets jump the gun trying to anticipate the course of events almost regularly, to the extent this nervousness must represent a regular and significant arbitrage opportunity, if the market instruments tied to the LIBOR rates have the same features. The overnight LIBOR chart is full of arbupt jumps up and down; the upward trend which began in 2005 looks like a staircase with distinct steps; these sharp features are gone in 3-month data. Curiously, the 12-month chart has "extra" oscillations which do not correspond to the clear-cut treds in the shorter term LIBOR data. Apparently these represent (often mistaken) attempts of bankers to price in their anticipation of LIBOR evolution. For example, the anticipated interest rates drop in early 2008 never materialized for EUR. As a result of this and other similar episodes, 12-month LIBOR is more volatile than many shorter maturities; the edges of the maturity gamut are more volatile than the middle. This will be seen also from Table 1 in the Volatility section.



Last Updated ( Monday, 14 September 2009 17:06 )