Sensitivity of the Euro OIS term structure to ECB policy rate surprises

We study how the euro-area yield curve reacts to abrupt and sizable changes in market expectations regarding the ECB policy rate. Taking changes in maintenance-period forward OIS rates as a market-based proxy for policy-rate surprises, we show that yield responses exhibit a systematic dependence on maturity. To interpret these patterns, we employ a short-rate model featuring stochastic jumps that can occur only at pre-announced ECB meeting dates and derive closed-form formulas for the conditional sensitivity of yields to shifts in the expected jump size. We then confront the model-implied term-structure responses with actual yield changes observed on days of large expectation revisions. Our framework matches both the cross-sectional profile and the magnitude of the observed sensitivities more closely than the Affine Arbitrage-Free Nelson-Siegel model [Christensen, J.H., Diebold, F.X. and Rudebusch, G.D., The affine arbitrage-free class of Nelson–Siegel term structure models. J. Econom., 2011, 164(1), 4–20. Annals Issue on Forecasting.], a widely used benchmark in term-structure analysis, thereby providing empirical support for the relevance of incorporating scheduled jump times in modeling interest-rate dynamics.