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Manipulation in Money Markets

  • Christian Ewerhart

    (IEW, University of Zurich and NCCR)

  • Nuno Cassola

    (European Central Bank)

  • Steen EJjerksov

    (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 characterise 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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Paper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 06-29.

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Length: 39 pages
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Handle: RePEc:chf:rpseri:rp0629
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  1. Bindseil, Ulrich & Nyborg, Kjell G & Strebulaev, Ilya, 2004. "Bidding and Performance in Repo Auctions: Evidence from ECB Open Market Operations," CEPR Discussion Papers 4367, C.E.P.R. Discussion Papers.
  2. Hartmann, Philipp & Manna, Michele & Manzanares, Andres, 2001. "The microstructure of the euro money market," Journal of International Money and Finance, Elsevier, vol. 20(6), pages 895-948, November.
  3. Nyborg, Kjell G. & Strebulaev, Ilya A., 2001. "Collateral and short squeezing of liquidity in fixed rate tenders," Journal of International Money and Finance, Elsevier, vol. 20(6), pages 769-792, November.
  4. 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.
  5. Ewerhart, Christian & Cassola, Nuno & Ejerskov, Steen & Valla, Natacha, 2003. "Optimal allotment policy in the Eurosystem's main refinancing operations," Working Paper Series 0295, European Central Bank.
  6. James D. Hamilton, 1996. "Measuring the liquidity effect," Working Papers in Applied Economic Theory 96-06, Federal Reserve Bank of San Francisco.
  7. Seth Carpenter & Selva Demiralp, 2004. "The liquidity effect in the federal funds market: evidence from daily open market operations," Finance and Economics Discussion Series 2004-61, Board of Governors of the Federal Reserve System (U.S.).
  8. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
  9. Daniel L. Thornton, 2001. "Identifying the liquidity effect at the daily frequency," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 59-82.
  10. Gabriel Pérez Quirós & Hugo Rodríguez Mendizábal, 2003. "The daily market for funds in Europe: what has changed with the EMU," Banco de Espa�a Working Papers 0313, Banco de Espa�a.
  11. Bicksler, James & Chen, Andrew H, 1986. " An Economic Analysis of Interest Rate Swaps," Journal of Finance, American Finance Association, vol. 41(3), pages 645-55, July.
  12. Vila, Jean-Luc, 1989. "Simple games of market manipulation," Economics Letters, Elsevier, vol. 29(1), pages 21-26.
  13. Allen, Franklin & Gorton, Gary, 1992. "Stock price manipulation, market microstructure and asymmetric information," European Economic Review, Elsevier, vol. 36(2-3), pages 624-630, April.
  14. Ewerhart, Christian, 2002. "A model of the Eurosystem's operational framework for monetary policy implementation," Working Paper Series 0197, European Central Bank.
  15. Noldeke, Georg & Troger, Thomas, 2001. "Existence of linear equilibria in the Kyle model with multiple informed traders," Economics Letters, Elsevier, vol. 72(2), pages 159-164, August.
  16. Mark Bagnoli & S. Viswanathan & Craig Holden, 2001. "On the Existence of Linear Equilibria in Models of Market Making," Mathematical Finance, Wiley Blackwell, vol. 11(1), pages 1-31.
  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.
  18. Gerard, Bruno & Nanda, Vikram, 1993. " Trading and Manipulation around Seasoned Equity Offerings," Journal of Finance, American Finance Association, vol. 48(1), pages 213-45, March.
  19. Claudio E. V. Borio, 1997. "Monetary policy operating procedures in industrial countries," BIS Working Papers 40, Bank for International Settlements.
  20. Allen, Franklin & Gale, Douglas, 1992. "Stock-Price Manipulation," Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 503-29.
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