Nonlinear Liquidity Adjustments in the Euro Area Overnight Money Market

51 Pages Posted: 15 Dec 2012

See all articles by Renaud Beaupain

Renaud Beaupain

Catholic University of Lille - IESEG School of Management; Lille Economie & Management (LEM) UMR 9221

Alain Durré

European Central Bank (ECB) - Directorate General Economics; IéSEG - Université Catholique de Lille; National Center for Scientific Research - LEM

Date Written: November 27, 2012

Abstract

The market-oriented approach promoted by the European Central Bank in the design of its refinancing operations creates incentives to credit insitutions to use actively the interbank market to manage their liquidity needs. In this context, we examine the ability of the overnight segment to guarantee the timely provision of unsecured funds to banks to smoothly absorb their liquidity shocks. This paper specifically focuses on the speed of reversion of transaction costs and available depth to their equilibrium levels in this market for overnight unsecured funds from 4 September 2000 to 31 December 2007. The reported evidence points to time-varying liquidity adjustments and identifies liquidity, market activity and the institutional setting of the ECB’s refinancing operations as significant determinants of the observed resiliency regimes. Our analysis also shows how the speed of mean reversion of market liquidity, by affecting the level and the volatility of the overnight market rate, also affects the anchoring of the yield curve in the euro area.

Keywords: overnight money market, market microstructure, transaction costs, price impact, mean reversion, financial turmoil

JEL Classification: C22, C25, G01, G10, G21, E52

Suggested Citation

Beaupain, Renaud and Durre, Alain C. J., Nonlinear Liquidity Adjustments in the Euro Area Overnight Money Market (November 27, 2012). ECB Working Paper No. 1500, Available at SSRN: https://ssrn.com/abstract=2181364

Renaud Beaupain (Contact Author)

Catholic University of Lille - IESEG School of Management ( email )

3, Rue de la Digue
Lille, 59000
France

Lille Economie & Management (LEM) UMR 9221 ( email )

Lille
France

Alain C. J. Durre

European Central Bank (ECB) - Directorate General Economics ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

IéSEG - Université Catholique de Lille ( email )

3, rue de la Digue
F-59800 Lille
France

National Center for Scientific Research - LEM ( email )

106-112 Boulevard de l'Hopital
F- 75647 Paris Cedex 13
France

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