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Manipulation in Money Markets

  • Christian Ewerhart

    (University of Zurich)

  • Nuno Cassola

    (European Central Bank)

  • Steen Ejerskov

    (Danmarks Nationalbank)

  • Natacha Valla

    (Banque de France)

Interest rate derivatives are among the most actively traded financial instruments in the main currency areas. With values of positions reacting immediately to the underlying index of daily interbank rates, manipulation has become an increasing challenge for the operational implementation of monetary policy. To address this issue, we study a microstructure model in which a commercial bank may have strategic recourse to central bank standing facilities. We characterize an equilibrium in which market rates will be manipulated with strictly positive probability. Our findings have an immediate bearing on recent developments in the sterling and euro money markets.

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Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

Volume (Year): 3 (2007)
Issue (Month): 1 (March)
Pages: 113-148

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Handle: RePEc:ijc:ijcjou:y:2007:q:1:a:4
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  16. Ewerhart, Christian, 2002. "A model of the Eurosystem's operational framework for monetary policy implementation," Working Paper Series 0197, European Central Bank.
  17. Kumar, Praveen & Seppi, Duane J, 1992. " Futures Manipulation with "Cash Settlement."," Journal of Finance, American Finance Association, vol. 47(4), pages 1485-502, September.
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