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ECB Monetary Policy and the EONIA Swap Spread

The effect of European Central Bank monetary policy upon EONIA swap spreads is investigated with GARCH-Jump models. I find that monetary policy, as expressed through the MRO (Main Refinancing Operations) rate, has an inverse relationship with the spread in EONIA swaps. At the same time, monetary policy has a positive relationship with volatility in spreads. The effect of monetary policy upon the likelihood of jumps in volatility is mixed. Temporary liquidity fluctuations in between main refinancing operations increase the likelihood of jumps in the swap term structure and in the size of the jumps.