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The federal funds market and the overnight Eurodollar market

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  • Lee, Yungsook

Abstract

Overnight Federal funds and overnight Eurodollars are among the most liquid short-term assets that a bank can hold to acquire required reserves. They are traded overnight and denominated in U.S. dollars. They also have different characteristics: The Fed funds market and the Eurodollar market are located in different places, and the transaction volume is larger in the overnight Eurodollar market than in the Fed funds market. This paper is an empirical work on the relationship between the Federal funds rate and the overnight Eurodollar rate. Hamilton (1996) found that the Fed funds rate exhibited calendar day effects over 1984-1990. I find that the overnight Eurodollar rate exhibits very similar calendar day effects but the absolute magnitudes are slightly less in general over 1984-1997. The empirical results support the hypothesis that the tendency in daily changes in the Federal funds rate and in the overnight Eurodollar rate are caused by line limits, transaction costs and accounting convention in the Federal funds market. The differential between the Fed funds rate and the overnight Eurodollar rate is predictable and it possibly provides the evidence against the efficient market hypothesis.

Suggested Citation

  • Lee, Yungsook, 1999. "The federal funds market and the overnight Eurodollar market," Research Notes 99-2, Deutsche Bank Research.
    • Handle: RePEc:zbw:dbrrns:992
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    Citations

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    Cited by:

    1. Bindseil, Ulrich & Seitz, Franz, 2001. "The supply and demand for Eurosystem deposits - The first 18 months," Working Paper Series 44, European Central Bank.
    2. Iichiro Uesugi & Guy M. Yamashiro, 2003. "On the Relationship Between the Very Short Forward and the Spot Interest Rate," Discussion papers 03013, Research Institute of Economy, Trade and Industry (RIETI).
    3. Yashkir, Olga & Yashkir, Yuriy, 2003. "Modelling of stochastic fat-tailed auto-correlated processes: an application to short-term rates," MPRA Paper 46391, University Library of Munich, Germany.
    4. Bindseil, Ulrich & Seitz, Franz, 2001. "The supply and demand for Eurosystem deposits - The first 18 months," Working Paper Series 0044, European Central Bank.

    More about this item

    Keywords

    Interest Rate Differential; Transaction Costs; Efficient Market Hypothesis; Calendar Effects;
    All these keywords.

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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