Forecasting the Intraday Market Price of Money

28 Pages Posted: 30 Sep 2011

See all articles by Andrea Monticini

Andrea Monticini

Catholic University of the Sacred Heart of Milan - Institute of Economy and Finance

Francesco Ravazzolo

Free University of Bolzano

Date Written: June 6, 2011

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.

Keywords: Interbank market, intraday interest rate, forecasting, density forecasting, policy

JEL Classification: C22, C53, E4, E5

Suggested Citation

Monticini, Andrea and Ravazzolo, Francesco, Forecasting the Intraday Market Price of Money (June 6, 2011). Norges Bank Working Paper No. 2011/06. Available at SSRN: https://ssrn.com/abstract=1935850 or http://dx.doi.org/10.2139/ssrn.1935850

Andrea Monticini

Catholic University of the Sacred Heart of Milan - Institute of Economy and Finance ( email )

Via Necchi 5
20123 Milano
Italy

Francesco Ravazzolo (Contact Author)

Free University of Bolzano ( email )

Bolzano
Italy

Register to save articles to
your library

Register

Paper statistics

Downloads
44
Abstract Views
467
PlumX Metrics