Abstract:

We study how revisions in expectations about European Central Bank (ECB) policy rates affect the euro-area yield curve. Using daily changes in maintenance-period forward OIS rates as a market-based measure of policy surprises, we show that yield responses are strongly maturity-dependent: they are largest around the intermediate sector of the curve, especially near the two-year maturity. To explain this pattern, we use a  model in which the short term rate can change only at the scheduled ECB meeting dates. The model delivers closed-form yield sensitivities to policy surprises and matches the empirical hump-shaped response better than the Arbitrage-Free Nelson-Siegel model, a benchmark for fixed-income studies. The results suggest that explicitly incorporating deterministic policy-event dates is important for understanding euro-area interest-rate dynamics and for measuring the exposure of fixed-income portfolios to ECB policy surprises. This has direct implications for fixed-income pricing, hedging, and risk management.