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Sporadic manipulation in money markets with central bank standing facilities

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  • Ewerhart, Christian
  • Cassola, Nuno
  • Ejerskov, Steen
  • Valla, Natacha

Abstract

In certain market environments, a large investor may benefit from building up a futures position first and trading subsequently in the spot market (Kumar and Seppi, 1992). The present paper identifies a variation of this type of manipulation that might occur in money markets with an interest rate corridor. We show that manipulation involving the use of central bank facilities would be observable only sporadically. The probability of manipulation decreases when the central bank uses an active liquidity management. Manipulation can also be reduced by widening the interest rate corridor. JEL Classification: D84, E52

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0399.

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Date of creation: Oct 2004
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Handle: RePEc:ecb:ecbwps:20040399

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Keywords: corridor system; manipulation; money market;

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  1. Quiros, Gabriel Perez & Mendizabal, Hugo Rodriguez, 2006. "The Daily Market for Funds in Europe: What Has Changed with the EMU?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(1), pages 91-118, February.
  2. Bagnoli, M. & Lipman, B., 1989. "Stock Price Manipulation Through Takeover Bids," Papers 90-09, Michigan - Center for Research on Economic & Social Theory.
  3. Kumar, Praveen & Seppi, Duane J, 1992. " Futures Manipulation with "Cash Settlement."," Journal of Finance, American Finance Association, vol. 47(4), pages 1485-502, September.
  4. Allen, Franklin & Gale, Douglas, 1992. "Stock-Price Manipulation," Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 503-29.
  5. Benabou, R. & Laroque, G., 1989. "Using Privileged Information To Manipulate Markets: Insiders, Gurus, And Credibility," Working papers 513, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. Vila, Jean-Luc, 1989. "Simple games of market manipulation," Economics Letters, Elsevier, vol. 29(1), pages 21-26.
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