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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
Date of creation:
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Handle: RePEc:chf:rpseri:rp0629
Contact details of provider: Web page: http://www.SwissFinanceInstitute.ch

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  1. Vila, Jean-Luc, 1989. "Simple games of market manipulation," Economics Letters, Elsevier, vol. 29(1), pages 21-26.
  2. 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.).
  3. 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.
  4. Hartmann, Philipp & Manna, Michele & Manzanares, Andrés, 2001. "The microstructure of the euro money market," Working Paper Series 0080, European Central Bank.
  5. Quiros, Gabriel Perez & Mendizabal, Hugo Rodriguez, 2006. "The Daily Market for Funds in Europe: What Has Changed with the EMU?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(1), pages 91-118, February.
  6. 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.
  7. Daniel L. Thornton, 2001. "Identifying the liquidity effect at the daily frequency," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 59-82.
  8. Bindseil, Ulrich & Nyborg, Kjell G. & Strebulaev, Ilya A., 2005. "Bidding and Performance in Repo Auctions: Evidence from ECB Open Market Operations," Discussion Papers 2005/13, Department of Business and Management Science, Norwegian School of Economics.
  9. 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.
  10. Allen, F. & Gorton, G., 1991. "Stock Price Manipulation, Market Microstructure and Asymetric Information," Weiss Center Working Papers 21-91, Wharton School - Weiss Center for International Financial Research.
  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. 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.
  13. 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.
  14. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
  15. Claudio E. V. Borio, 1997. "Monetary policy operating procedures in industrial countries," BIS Working Papers 40, Bank for International Settlements.
  16. 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.
  17. James D. Hamilton, 1996. "Measuring the liquidity effect," Working Papers in Applied Economic Theory 96-06, Federal Reserve Bank of San Francisco.
  18. Allen, Franklin & Gale, Douglas, 1992. "Stock-Price Manipulation," Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 503-29.
  19. Kumar, Praveen & Seppi, Duane J, 1992. " Futures Manipulation with "Cash Settlement."," Journal of Finance, American Finance Association, vol. 47(4), pages 1485-502, September.
  20. Ewerhart, Christian, 2002. "A model of the Eurosystem's operational framework for monetary policy implementation," Working Paper Series 0197, European Central Bank.
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