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A look at intraday frictions in the euro area overnight deposit market

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  • Brousseau, Vincent
  • Manzanares, Andrés

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. JEL Classification: D4, E52, C61

Suggested Citation

  • Brousseau, Vincent & Manzanares, Andrés, 2005. "A look at intraday frictions in the euro area overnight deposit market," Working Paper Series 439, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:2005439
    Note: 229699
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp439.pdf
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    References listed on IDEAS

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    1. Gabriel Pérez Quirós & Hugo Rodríguez, 2000. "The daily market for funds in Europe: Has something changed with the EMU?," Economics Working Papers 474, Department of Economics and Business, Universitat Pompeu Fabra.
    2. Gaspar, Vitor & Pérez-Quirós, Gabriel & Rodriguez Mendizabal, Hugo, 2004. "Interest Rate Determination in the Interbank Market," CEPR Discussion Papers 4516, C.E.P.R. Discussion Papers.
    3. Bartolini, Leonardo & Bertola, Giuseppe & Prati, Alessandro, 2001. "Banks' reserve management, transaction costs, and the timing of Federal Reserve intervention," Journal of Banking & Finance, Elsevier, vol. 25(7), pages 1287-1317, July.
    4. Hartmann, Philipp & Manna, Michele & Manzanares, Andres, 2001. "The microstructure of the euro money market," Journal of International Money and Finance, Elsevier, vol. 20(6), pages 895-948, November.
    5. Angelini, Paolo, 2000. "Are Banks Risk Averse? Intraday Timing of Operations in the Interbank Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(1), pages 54-73, February.
    6. Bindseil, Ulrich & Seitz, Franz, 2001. "The supply and demand for Eurosystem deposits - The first 18 months," Working Paper Series 44, European Central Bank.
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    Citations

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    Cited by:

    1. Gabbi, G. & Germano, G. & Hatzopoulos, V. & Iori, G. & Politi, M., 2012. "Market microstructure, bank's behaviour and interbank spreads," Working Papers 12/06, Department of Economics, City University London.
    2. Iori Giulia & Kapar Burcu & Olmo Jose, 2015. "Bank characteristics and the interbank money market: a distributional approach," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 19(3), pages 249-283, June.
    3. Giulia Iori & Mauro Politi & Guido Germano & Giampaolo Gabbi, 2015. "Banks' Strategies and Cost of Money: Effects of the Financial Crisis on the European Electronic Overnight Interbank Market," Journal of Financial Management, Markets and Institutions, Società editrice il Mulino, issue 2, pages 179-202, December.
    4. Monticini, Andrea & Ravazzolo, Francesco, 2014. "Forecasting the intraday market price of money," Journal of Empirical Finance, Elsevier, vol. 29(C), pages 304-315.
    5. Burcu Kapar & Giulia Iori & Giampaolo Gabbi & Guido Germano, 2020. "Market microstructure, banks’ behaviour and interbank spreads: evidence after the crisis," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 15(1), pages 283-331, January.

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    More about this item

    Keywords

    Financial market microstructure; Market friction; money market; Network optimization problems;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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