Informed trading in the Euro money market for term lending
AbstractI address the role of information heterogeneity in the Euro interbank market for unsecured term lending. I use high-frequency quotes of bid and ask prices to estimate probabilities of informed trading for contract maturities from one month to one year. The dataset spans from November 2000 to March 2008, and includes the relevant events that characterize the developments of the Euro area money market. I obtain four main results. First, I show that the loose supply of liquidity of the ECB has not dampened the distortions arising from asymmetric information in the unsecured money market. I also find that the probability of trading with a better informed bank is higher on days when open market operations take place, and at the end of the maintenance period. This effect has strengthened during the turmoil. The results indicate that information is segmented, in the sense that heterogenous knowledge among banks is maturity-specific. Finally, the paper presents some evidence suggesting that the risk of trading with a counterparty that enjoys an enhanced information set is priced.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 20415.
Date of creation: 03 Feb 2010
Date of revision:
Market microstructure; PIN model; money markets; term structure;
Other versions of this item:
- Paolo Zagaglia, 2010. "Informed Trading in the Euro Money Market for Term Lending," Working Paper Series 02_10, The Rimini Centre for Economic Analysis.
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-02-20 (All new papers)
- NEP-BAN-2010-02-20 (Banking)
- NEP-CFN-2010-02-20 (Corporate Finance)
- NEP-CTA-2010-02-20 (Contract Theory & Applications)
- NEP-EEC-2010-02-20 (European Economics)
- NEP-MAC-2010-02-20 (Macroeconomics)
- NEP-MON-2010-02-20 (Monetary Economics)
- NEP-MST-2010-02-20 (Market Microstructure)
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