Manipulation in Money Markets

42 Pages Posted: 26 Nov 2006

See all articles by Christian Ewerhart

Christian Ewerhart

University of Zurich, Department of Economics

Nuno Cassola

University of Milan Bicocca - CefES; University of Lisbon - CEMAPRE

Steen Ejerskov

European Central Bank (ECB)

Natacha Valla

European Union - European Investment Bank; European Central Bank (ECB); Banque de France

Abstract

Interest rate derivatives are among the most actively traded financial instruments in the main currency areas. With values of positions reacting immediately to the underlying index of daily interbank rates, manipulation has become an increasing challenge for the operational implementation of monetary policy. To address this issue, we study a microstructure model in which a commercial bank may have strategic recourse to central bank standing facilities. We characterise an equilibrium in which market rates will be manipulated with strictly positive probability. Our findings have an immediate bearing on recent developments in the Sterling and Euro money markets.

Keywords: Manipulation, Money markets, SWAPS

JEL Classification: D84, E52

Suggested Citation

Ewerhart, Christian and Cassola, Nuno and Ejerskov, Steen and Valla, Natacha, Manipulation in Money Markets. Swiss Finance Institute Research Paper No. 29, Available at SSRN: https://ssrn.com/abstract=947086 or http://dx.doi.org/10.2139/ssrn.947086

Christian Ewerhart (Contact Author)

University of Zurich, Department of Economics ( email )

Schoenberggasse 1
Zurich, CH-8001
Switzerland

Nuno Cassola

University of Milan Bicocca - CefES ( email )

Milan
Italy

University of Lisbon - CEMAPRE ( email )

Lisbon
Portugal

Steen Ejerskov

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Natacha Valla

European Union - European Investment Bank ( email )

98-100 Boulevard Konrad Adenauer
L-2950
Luxembourg

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 13440 (Phone)

Banque de France ( email )

31 rue Croix des Petits Champs
75049 Paris Cedex 01
France
+33 1 42922756 (Phone)
+33 1 42926296 (Fax)

HOME PAGE: http://www.iue.it/Personal/Researchers/valla/

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