Asset Managers, Eurodollars and Unconventional Monetary Policy

30 Pages Posted: 30 Aug 2016

See all articles by Lawrence Kreicher

Lawrence Kreicher

Dartmouth College

Robert N. McCauley

Bank for International Settlements (BIS)

Date Written: August 2016

Abstract

An asset manager's rapid liquidation in the weeks around the end of September 2014 of a very large position in eurodollar futures, a huge derivatives market that allows traders to position on the future path of dollar money rates, raises two questions. What is the profile of asset managers in this key market? And how has the Federal Reserve's unconventional monetary policy, including forward guidance about policy rates, affected this market? Asset managers generally hold the largest eurodollar positions among buy-side traders but play a lesser role in day-to-day trading. Second, the Fed's unconventional policy saw the average maturity of eurodollar contracts traded between 2008 and 2014 double and it has remained at an elevated maturity since then. Moreover, from 2012 into 2015 eurodollar turnover responded more strongly to Federal Reserve announcements than to macroeconomic news, a finding analogous to that of Filardo and Hofmann (2014) for yields. In 2015 asset managers took a large short position in eurodollar futures; this unprecedented position would profit if the Federal Reserve's own projections of policy rates ("dots") were realised. Judging from eurodollar futures, asset managers now play an important role in facilitating or hindering the transmission of monetary policy to market rates.

Keywords: asset managers, mutual funds, derivatives, unconventional monetary policy, forward guidance, money market, eurodollar futures

JEL Classification: E43, E44, E52, F36, G23

Suggested Citation

Kreicher, Lawrence and McCauley, Robert N., Asset Managers, Eurodollars and Unconventional Monetary Policy (August 2016). BIS Working Paper No. 578. Available at SSRN: https://ssrn.com/abstract=2831691

Lawrence Kreicher (Contact Author)

Dartmouth College ( email )

Department of Sociology
Hanover, NH 03755
United States

Robert N. McCauley

Bank for International Settlements (BIS) ( email )

CH-4002 Basel, Basel-Stadt
Switzerland

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