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Money market integration

  • Leonardo Bartolini
  • Spence Hilton
  • Alessandro Prati

We use transaction-level data and detailed modeling of the high-frequency behavior of federal funds-Eurodollar yield spreads to provide evidence of strong integration between the federal funds and Eurodollar markets, the two core components of the dollar money market. Our results contrast with previous research indicating that these two markets are segmented, showing them to be well integrated even at high (intraday) frequency. We document several patterns in the behavior of federal funds-Eurodollar spreads, including liquidity effects from trading volume on yield spreads' volatility. Our analysis supports the view that targeting federal funds rates alone is sufficient to stabilize rates in the (much larger) dollar money market as a whole.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 227.

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Date of creation: 2005
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Handle: RePEc:fip:fednsr:227
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  1. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
  2. Selva Demiralp & Brian Preslopsky & William Whitesell, 2004. "Overnight interbank loan markets," Finance and Economics Discussion Series 2004-29, Board of Governors of the Federal Reserve System (U.S.).
  3. Harrison Hong & Jiang Wang, 2000. "Trading and Returns under Periodic Market Closures," Journal of Finance, American Finance Association, vol. 55(1), pages 297-354, 02.
  4. Ken B. Cyree & Mark D. Griffiths & Drew B. Winters, 2003. "On the pervasive effects of Federal Reserve settlement regulations," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 27-46.
  5. Griffiths, Mark D. & Winters, Drew B., 1995. "Day-of-the-week effects in federal funds rates: Further empirical findings," Journal of Banking & Finance, Elsevier, vol. 19(7), pages 1265-1284, October.
  6. Rhee, S Ghon & Chang, Rosita P, 1992. " Intra-day Arbitrage Opportunities in Foreign Exchange and Eurocurrency Markets," Journal of Finance, American Finance Association, vol. 47(1), pages 363-79, March.
  7. Hamilton, James D, 1996. "The Daily Market for Federal Funds," Journal of Political Economy, University of Chicago Press, vol. 104(1), pages 26-56, February.
  8. Bartolini, Leonardo & Bertola, Giuseppe & Prati, Alessandro, 2002. "Day-to-Day Monetary Policy and the Volatility of the Federal Funds Interest Rate," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(1), pages 137-59, February.
  9. Balduzzi, Pierluigi, et al, 1998. "Interest Rate Targeting and the Dynamics of Short-Term Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(1), pages 26-50, February.
  10. Lee, Young-Sook, 2003. "The Federal funds market and the overnight Eurodollar market," Journal of Banking & Finance, Elsevier, vol. 27(4), pages 749-771, April.
  11. Cyree, Ken B & Winters, Drew B, 2001. "Analysis of Federal Funds Rate Changes and Variance Patterns," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 24(3), pages 403-18, Fall.
  12. Ken B. Cyree & Drew B. Winters, 2001. "Analysis Of Federal Funds Rate Changes And Variance Patterns," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 24(3), pages 403-418, 09.
  13. Andersen, Torben G. & Lund, Jesper, 1997. "Estimating continuous-time stochastic volatility models of the short-term interest rate," Journal of Econometrics, Elsevier, vol. 77(2), pages 343-377, April.
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