Settlement Delays in the Money Market

33 Pages Posted: 18 Mar 2008

See all articles by Leonardo Bartolini

Leonardo Bartolini

affiliation not provided to SSRN (deceased)

Spence Hilton

Federal Reserve Bank of New York - Research Group; National Bureau of Economic Research (NBER)

James McAndrews

Wharton Financial Institutions Center

Date Written: March 1, 2008

Abstract

We track 38,000 money market trades from execution to delivery and return to provide a first empirical analysis of settlement delays in financial markets. In line with predictions from recent models showing that financial claims are settled strategically, we document a tendency by lenders to delay delivery of loaned funds until the afternoon hours. We find that banks follow a simple strategy to manage the risk of account overdrafts delaying the settlement of large payments relative to that of small payments. More sophisticated strategies, such as increasing settlement delays when own liquid balances are low and when dealing with small trading partners, play a marginal role. We also find evidence of strategic delay in the return of borrowed funds, although we can explain a smaller fraction of the dispersion in delays in the return than in the delivery leg of money market lending.

Keywords: money market trading, settlement delay, gridlock equilibria

JEL Classification: G21, C78, L14

Suggested Citation

Bartolini (deceased), Leonardo and Hilton, Spence and McAndrews, James, Settlement Delays in the Money Market (March 1, 2008). FRB of New York Staff Report No. 319, Available at SSRN: https://ssrn.com/abstract=1107476 or http://dx.doi.org/10.2139/ssrn.1107476

Leonardo Bartolini (deceased) (Contact Author)

affiliation not provided to SSRN (deceased)

Spence Hilton

Federal Reserve Bank of New York - Research Group ( email )

33 Liberty Street
New York, NY 10045
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

James McAndrews

Wharton Financial Institutions Center ( email )

2306 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
United States
9176090086 (Phone)
19104 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
104
Abstract Views
1,657
Rank
477,534
PlumX Metrics