Universal Journal of Accounting and Finance 9(6): 1332-1341, 2021 http://www.hrpub.org DOI: 10.13189/ujaf.2021.090612 Modeling Euribor Rates Volatility: Application of the GARCH Model Llesh Lleshaj 1,* , Dorina Kripa 2 1 Faculty of Economy, University of Tirana, Albania 2 Department of Finance, Faculty of Economy, University of Tirana, Albania Received June 17, 2021; Revised July 16, 2021; Accepted August 5, 2021 Cite This Paper in the following Citation Styles (a): [1] Llesh Lleshaj, Dorina Kripa , "Modeling Euribor Rates Volatility: Application of the GARCH Model," Universal Journal of Accounting and Finance, Vol. 9, No. 6, pp. 1332 - 1341, 2021. DOI: 10.13189/ujaf.2021.090612. (b): Llesh Lleshaj, Dorina Kripa (2021). Modeling Euribor Rates Volatility: Application of the GARCH Model. Universal Journal of Accounting and Finance, 9(6), 1332 - 1341. DOI: 10.13189/ujaf.2021.090612. Copyright©2021 by authors, all rights reserved. Authors agree that this article remains permanently open access under the terms of the Creative Commons Attribution License 4.0 International License Abstract Euribor (Euro Interbank Offered Rate) is considered to be the most important base rate for all types of financial products like interest rate swaps, interest rate futures, saving accounts and mortgages. Euribor rates turned negative for the first time in January 2015 and have been negative ever since. In recent years, several European central banks have imposed negative interest rates on commercial banks, which are the only way to stimulate their nations’ economies. Under these circumstances, the purpose of this study is to estimate the optimal equilibrium of the negative rates which are still increasing constantly. This fact raises doubts about the financial stability in many countries and the effect of monetary policy in stimulating economic growth in European countries. This study has analyzed the volatility of the Euribor rates related to the daily time series 2015-2021. Advanced volatility econometric methods are applied to GARCH models and volatility forecasting in the long-run equilibrium. The optimal model for the weekly and monthly maturity rates is identified; however, the larger the ARCH(p) and lag-variance(q) value we test, the poorer the performance of the obtained model is. Practical implications ought to be taken into consideration by the banking sector and other financial institutions. Keywords Euribor, GARCH Volatility Modeling, Optimal Long-Run Equilibrium 1. Introduction Euro Interbank Offer Rate (Euribor) as a reference rate is constructed from the average interest rate at which Eurozone banks offer unsecured short-term lending on the inter-bank market. The maturities on loans used to calculate Euribor often range from one week to one year (which makes Euribor an index reference). These Euribor rates, which are updated daily, represent the average interest rate that Eurozone banks charge one another for uncollateralized loans. Euribor rates are an important benchmark for a range of euro-denominated financial products, including mortgages, savings accounts, car loans, and various derivatives securities [10,16,28]. The global interest rates have been declining for many years, even decades. This trend is related to many fundamental factors. There are two prevailing views: (1) Structural factors have pushed interest rates to record low levels. These structural factors include demographics and longer life expectancy, which affects individuals' propensity to save and invest. (2) The lower interest rates are a reaction to the high financial leverage levels, which contributed to the global financial crisis. According to this view, lower interest rates are necessary to facilitate the deleveraging process, thereby they are expected to return to normal in the future. However, Euribor does not return to equilibrium, as it has been performing at negative rates for years. The figure 1 A and B below give the trend of the Euribor rates with maturity from one week to one year: