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Forecasting the intraday market price of money

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  • Andrea Monticini

    ()
    (Universita Cattolica - Milano)

  • Francesco Ravazzolo

    ()
    (Norges Bank (Central Bank of Norway))

Abstract

Market efficiency hypothesis suggests a zero level for the intraday interest rate. However, a liquidity crisis introduces frictions related to news, which can cause an upward jump of the intraday rate. This paper documents that these dynamics can be partially predicted during turbulent times. A long memory approach outperforms random walk and autoregressive benchmarks in terms of point and density forecasting. The gains are particular high when the full distribution is predicted and probabilistic assessments of future movements of the interest rate derived by the model can be used as a policy tool for central banks to plan supplementary market operations during turbulent times. Adding exogenous variables to proxy funding liquidity and counterparty risks does not improve forecast accuracy and the predictability seems to derive from the econometric properties of the series more than from news available to financial markets in realtime.

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Bibliographic Info

Paper provided by Norges Bank in its series Working Paper with number 2011/06.

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Length: 26 pages
Date of creation: 06 Jun 2011
Date of revision:
Handle: RePEc:bno:worpap:2011_06

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Keywords: Interbank market; Intraday interest rate; Forecasting; Density forecasting; Policy tools.;

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Cited by:
  1. Luca Arciero & Ronald Heijmans & Richard Heuver & Marco Massarenti & Cristina Picillo & Francesco Vacirca, 2013. "How to measure the unsecured money market? The Eurosystem's implementation and validation using TARGET2 data," DNB Working Papers 369, Netherlands Central Bank, Research Department.
  2. Russel Davidson & Andrea Monticini, 2014. "Heteroskedasticity-and-Autocorrelation-Consistent Bootstrapping," DISCE - Working Papers del Dipartimento di Economia e Finanza def12, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).

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