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The Venezuelan Overnight Fund Market: Understanding a Credit Constraint Limit Order Market

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  • Pagliacci, Carolina

Abstract

The Venezuelan overnight market trades funds electronically similarly to limit order markets, but allows the imposition of credit lines, which inflict binding credit restrictions to some participants and introduce a peculiar bid-ask spread dynamic. The objective of this paper is to determine whether the trading costs exhibited in this market can be explained by credit constraints, and other particular market features such as, the degree of collateralized trades and the flow of government payments into the financial system. Econometrically, we test this hypothesis using a definition of effective spread that takes into account the special microstructure of the market, and measuring credit constraints throughout two different observable expressions. We carry out the empirical study estimating single equation GARCH models on the effective spread and on other two broader measures of market performance extracted from the application of principal component analysis. Results indicate that distortions associated to credit constraints are important, and there is room for policy prescriptions that promote the elimination of credit lines.

Suggested Citation

  • Pagliacci, Carolina, 2006. "The Venezuelan Overnight Fund Market: Understanding a Credit Constraint Limit Order Market," MPRA Paper 106541, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:106541
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    File URL: https://mpra.ub.uni-muenchen.de/106541/1/MPRA_paper_106541.pdf
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    References listed on IDEAS

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    Cited by:

    1. María Fernanda Hernández & Juan José Valero & María Bernardette Díaz, 2007. "Perfil de riesgos del sistema bancario venezolano: aplicación de la metodología de stress testing," Monetaria, CEMLA, vol. 0(4), pages 405-452, octubre-d.

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    More about this item

    Keywords

    Money Market Microstructure; Limit Order Market; Credit Constraint; Trading Cost; Monetary Policy;
    All these keywords.

    JEL classification:

    • C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Microeconomic Data; Data Access
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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