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Implicit intraday interest rate in the UK unsecured overnight money market

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  • Jurgilas, Marius

    ()
    (Norges Bank)

  • Zikes, Filip

    ()
    (Bank of England)

Abstract

This paper estimates the intraday value of money implicit in the UK unsecured overnight money market. Using transactions data on overnight loans advanced through the UK large-value payments system (CHAPS) in 2003-09, we find a positive and economically significant intraday interest rate. While the implicit intraday interest rate is quite small pre-crisis, it increases more than tenfold during the financial crisis of 2007-09. The key interpretation is that an increase in the implicit intraday interest rate reflects the increased opportunity cost of pledging collateral intraday and can be used as an indicator to gauge the stress of the payment system. We obtain qualitatively similar estimates of the intraday interest rate using quoted intraday bid and offer rates and confirm that our results are not driven by the intraday variation in the bid-ask spread.

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Bibliographic Info

Paper provided by Bank of England in its series Bank of England working papers with number 447.

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Length: 35 pages
Date of creation: 19 Mar 2012
Date of revision:
Handle: RePEc:boe:boeewp:0447

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Keywords: Interbank money market; intraday liquidity;

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References

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  1. Antoine Martin, 2002. "Optimal pricing of intra-day liquidity," Research Working Paper, Federal Reserve Bank of Kansas City RWP 02-02, Federal Reserve Bank of Kansas City.
  2. Bech, Morten L. & Garratt, Rod, 2003. "The intraday liquidity management game," Journal of Economic Theory, Elsevier, Elsevier, vol. 109(2), pages 198-219, April.
  3. Gu, Chao & Guzman, Mark & Haslag, Joseph, 2011. "Production, hidden action, and the payment system," Journal of Monetary Economics, Elsevier, Elsevier, vol. 58(2), pages 172-182, March.
  4. Joydeep Bhattacharya & Joseph H. Haslag & Antoine Martin, 2007. "Why does overnight liquidity cost more than intraday liquidity?," Staff Reports, Federal Reserve Bank of New York 281, Federal Reserve Bank of New York.
  5. Acharya, Viral V & Merrouche, Ouarda, 2012. "Precautionary hoarding of liquidity and inter-bank markets: Evidence from the sub-prime crisis," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8859, C.E.P.R. Discussion Papers.
  6. Sébastien Kraenzlin & Thomas Nellen, 2010. "Daytime is money," Working Papers 2010-06, Swiss National Bank.
  7. Antoine Martin & James McAndrews, 2007. "Liquidity-saving mechanisms," Staff Reports, Federal Reserve Bank of New York 282, Federal Reserve Bank of New York.
  8. ANTOINE MARTIN & JAMES McANDREWS, 2010. "Should There Be Intraday Money Markets?," Contemporary Economic Policy, Western Economic Association International, vol. 28(1), pages 110-122, 01.
  9. Leonardo Bartolini & Svenja Gudell & Spence Hilton & Krista Schwarz, 2005. "Intraday trading in the overnight federal funds market," Current Issues in Economics and Finance, Federal Reserve Bank of New York, Federal Reserve Bank of New York, vol. 11(Nov).
  10. Wetherilt, Anne & Zimmerman, Peter & Soramaki, Kimmo, 2010. "The sterling unsecured loan market during 2006-08: insights from network theory," Bank of England working papers, Bank of England 398, Bank of England.
  11. Fecht, Falko & Nyborg, Kjell G. & Rocholl, Jörg, 2011. "The price of liquidity: The effects of market conditions and bank characteristics," Journal of Financial Economics, Elsevier, Elsevier, vol. 102(2), pages 344-362.
  12. Huberto M. Ennis & John A. Weinberg, 2007. "Interest on reserves and daylight credit," Economic Quarterly, Federal Reserve Bank of Richmond, Federal Reserve Bank of Richmond, issue Spr, pages 111-142.
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Cited by:
  1. Andrea Monticini & Francesco Ravazzolo, 2011. "Forecasting the intraday market price of money," Working Paper, Norges Bank 2011/06, Norges Bank.

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