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Forecasting the intraday market price of money

Author

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  • Andrea Monticini

    (Universita Cattolica - Milano)

  • Francesco Ravazzolo

    (Norges Bank (Central Bank of Norway))

Abstract

Market efficiency hypothesis suggests a zero level for the intraday interest rate. However, a liquidity crisis introduces frictions related to news, which can cause an upward jump of the intraday rate. This paper documents that these dynamics can be partially predicted during turbulent times. A long memory approach outperforms random walk and autoregressive benchmarks in terms of point and density forecasting. The gains are particular high when the full distribution is predicted and probabilistic assessments of future movements of the interest rate derived by the model can be used as a policy tool for central banks to plan supplementary market operations during turbulent times. Adding exogenous variables to proxy funding liquidity and counterparty risks does not improve forecast accuracy and the predictability seems to derive from the econometric properties of the series more than from news available to financial markets in realtime.

Suggested Citation

  • Andrea Monticini & Francesco Ravazzolo, 2011. "Forecasting the intraday market price of money," Working Paper 2011/06, Norges Bank.
    • Handle: RePEc:bno:worpap:2011_06
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    More about this item

    Keywords

    Interbank market; Intraday interest rate; Forecasting; Density forecasting; Policy tools.;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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