Sporadic Manipulation in Money Markets with Central Bank Standing Facilities
36 Pages Posted: 13 Dec 2004
Date Written: October 2004
In certain market environments, a large investor may benefit from building up a futures position first and trading subsequently in the spot market (Kumar and Seppi, 1992). The present paper identifies a variation of this type of manipulation that might occur in money markets with an interest rate corridor. We show that manipulation involving the use of central bank facilities would be observable only sporadically. The probability of manipulation decreases when the central bank uses an active liquidity management. Manipulation can also be reduced by widening the interest rate corridor.
Keywords: Money market, corridor system, manipulation
JEL Classification: D84, E52
Suggested Citation: Suggested Citation