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Manipulation in money markets


Ewerhart, Christian; Cassola, Nuno; Ejerskov, Steen; Valla, Natacha (2007). Manipulation in money markets. International Journal of Central Banking, 3(1):113-148.

Abstract

Interest rate derivatives are among the most actively traded financial instruments in the main currency areas. With values of positions reacting immediately to the underlying index of daily interbank rates, manipulation has become an increasing challenge for the operational implementation of monetary policy. To address this issue, we study a microstructure model in which a commercial bank may have strategic recourse to central bank standing facilities. We characterise an equilibrium in which market rates will be manipulated with strictly positive probability. Our findings have an immediate bearing on recent developments in the Sterling and Euro money markets.

Interest rate derivatives are among the most actively traded financial instruments in the main currency areas. With values of positions reacting immediately to the underlying index of daily interbank rates, manipulation has become an increasing challenge for the operational implementation of monetary policy. To address this issue, we study a microstructure model in which a commercial bank may have strategic recourse to central bank standing facilities. We characterise an equilibrium in which market rates will be manipulated with strictly positive probability. Our findings have an immediate bearing on recent developments in the Sterling and Euro money markets.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
Language:English
Date:March 2007
Deposited On:22 Jan 2010 14:29
Last Modified:05 Apr 2016 13:31
Publisher:Federal Reserve Board
ISSN:1815-4654
Official URL:http://www.ijcb.org/journal/ijcb07q1a4.htm
Permanent URL: https://doi.org/10.5167/uzh-23607

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