A Look at Intraday Frictions in the Euro Area Overnight Deposit Market

41 Pages Posted: 5 May 2005

See all articles by Vincent Brousseau

Vincent Brousseau

European Central Bank, Directorate General Economics

Andres Manzanares

European Central Bank (ECB)

Date Written: February 2005

Abstract

This paper studies frictions in the euro area interbank deposit overnight market, making use of high frequency individual quote and trade data. The aim of the analysis is to determine, in a quantitative way, how efficient this market is. Besides a comprehensive descriptive analysis, the approach used defines a measure of the friction arising for each single transaction, by which we understand an (small) initial loss accepted by a counterparty, and the corresponding gain made by the other counterparty. The evolution of total daily frictions is then put into perspective comparing it with the frictions arising if flows corresponded to the optimal solution of a "cash transportation problem." The main conclusions of this exercise are that overall frictions, although small in absolute size, tend to increase strongly whenever the overnight rate becomes volatile. Some tentative explanations for this are given, relying on the introduced methodology.

Keywords: Financial market microstructure, Money Market, Market friction, Network optimization problems

JEL Classification: D4, E52, C61

Suggested Citation

Brousseau, Vincent and Manzanares, Andres, A Look at Intraday Frictions in the Euro Area Overnight Deposit Market (February 2005). Available at SSRN: https://ssrn.com/abstract=647963

Vincent Brousseau (Contact Author)

European Central Bank, Directorate General Economics ( email )

Kaiserstrasse 29
Frankfurt am Main, 60311
Germany
0049 69 13440 (Phone)
0044 69 1344 6000 (Fax)

Andres Manzanares

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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