Relationship between treasury bills and eurodollars: Theoretical and empirical analyses

Cheng Few Lee, Keshab Shrestha, Robert L. Welch

Research output: Contribution to journalArticlepeer-review

1 Scopus citations


In this paper, we derive an equilibrium relationship between the yields on Eurodollar and Treasury bills based on equivalent martingale results derived by Harrison and Kreps (1979) and Harrison and Pliska (1981, 1983) as well as the corporate debt pricing model developed by Merton (1974). The derived equilibrium relationship incorporates the models used by Booth and Tse (1995) and Shrestha and Welch (2001) as special cases. The equilibrium relationship indicates that the conditional volatility of the yield on Eurodollars explains the variation in the TED spread. We empirically test the equilibrium relationship using a GARCH-M model and the concept of fractional cointegration. We use both the ex ante data implied by the respective futures contracts as well as the ex post spot data with daily, weekly and monthly frequencies. We find empirical support for the Equilibrium relationship.

Original languageEnglish (US)
Pages (from-to)163-185
Number of pages23
JournalReview of Quantitative Finance and Accounting
Issue number2
StatePublished - Feb 2007

All Science Journal Classification (ASJC) codes

  • Accounting
  • Business, Management and Accounting(all)
  • Finance


  • Fractional cointegration
  • Stationary
  • TED spread


Dive into the research topics of 'Relationship between treasury bills and eurodollars: Theoretical and empirical analyses'. Together they form a unique fingerprint.

Cite this