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The interday and intraday patterns of the overnight market: evidence from an electronic platform

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  • Beaupain, Renaud
  • Durré, Alain

Abstract

This paper examines the interday and intraday dynamics of the euro area overnight money market on the basis of an original set of market activity and liquidity proxies constructed from both pre- and post-trade data. The empirical literature provides extensive evidence supporting the rejection of the martingale hypothesis both between days and within days, primarily for interest rates and volatility. We extend this analysis and investigate the seasonality of market activity and liquidity in a market dominated by utilitarian traders. We provide evidence that the Eurosystem's operational framework and calendar effects cause the observed regular patterns. We additionally show that utilitarian trading intensifies at the turn of the reserve maintenance period. The increased uncertainty associated with greater information asymmetry between market participants when reserve requirements become binding lead to a deterioration of market liquidity. Our analysis additionally turns out to be sensitive to the implementation in March 2004 of structural changes to the operational framework and to the more frequent occurrence of fine-tuning operations since October 2004. JEL Classification: E43, E58, C22, C32

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0988.

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Date of creation: Dec 2008
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Handle: RePEc:ecb:ecbwps:20080988

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Related research

Keywords: Eurosystem's operational framework; market microstructure; Overnight money market; seasonality; tick data;

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Cited by:
  1. Beaupain, Renaud & Durré, Alain, 2013. "Central bank reserves and interbank market liquidity in the euro area," Journal of Financial Intermediation, Elsevier, vol. 22(2), pages 259-284.
  2. Paolo Zagaglia, 2010. "Informed Trading in the Euro Money Market for Term Lending," Working Paper Series 02_10, The Rimini Centre for Economic Analysis.
  3. Raddant, Matthias, 2014. "Structure in the Italian overnight loan market," Journal of International Money and Finance, Elsevier, vol. 41(C), pages 197-213.
  4. Beaupain, Renaud & Durré, Alain, 2012. "Nonlinear liquidity adjustments in the euro area overnight money market," Working Paper Series 1500, European Central Bank.
  5. Silvia Gabrieli, 2010. "The functioning of the European interbank market during the 2007-08 financial crisis," CEIS Research Paper 158, Tor Vergata University, CEIS, revised 28 May 2010.
  6. Gabbi, G. & Germano, G. & Hatzopoulos, V. & Iori, G. & Politi, M., 2012. "Market microstructure, bank's behaviour and interbank spreads," Working Papers 12/06, Department of Economics, City University London.

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