This paper investigates transactions and interest rates on brokered and direct trades in federal funds, Eurodollar transactions, and repurchase agreements, all of which are used by banks in overnight funding. We expand on earlier work on calendar-day effects in these markets, investigating also volumes of funding in recent years. Our data include daily trades in federal funds reported by major brokers and also records of uncollateralized transactions over the wire transfer system operated by the Federal Reserve. We find that the share of the overnight interbank loan market represented by brokered fed funds has decreased and is now only about one-third of the total. We also show evidence of close but incomplete arbitrage among the major segments of the overnight interbank market, though the specific calendarday patterns of spreads and volatilities have evolved relative to the literature using earlier sample periods. Overnight Interbank Loan Markets I. Introduction Depository institutions (hereafter, "banks") typically process over $1 trillion of payments per day through their accounts at Federal Reserve Banks. Opening positions and the flow of payments over the day tend to leave some banks in deficit in their Fed account. Other banks have a surplus in excess of their needs to meet reserve requirements and to hold balances as a precaution against late postings that could cause costly overnight overdrafts. In consequence, banks need a highly liquid market for overnight, same-day-settlement loans among each other. Traditionally, the federal funds market met this need. In recent years, however, overnight Eurodollars have increasingly provided a similar role. In principle, interbank lending could also take place in the market for repurchase agreements, but in trading among each other, banks typically prefer to forego the additional transaction costs associated with handling collateral. An earlier literature, including papers by Spindt and Hoffmeister (1988), Griffiths and Winters (1995), and Hamilton (1996), had demonstrated that the brokered federal funds rate exhibits calendar day effects associated with the maintenance period for reserve requirements and also with holidays and quarter ends. More recently, Griffiths and Winters (1997) found such effects in the interest rate on repurchase agreements on general Treasury collateral (hereafter, "repo" rate). Using a 1984 to 1997 sample period, Lee (2003a) found that the overnight Eurodollar bid rate exhibits day-of-the-maintenance-period effects similar to but smaller in magnitude than those in the brokered federal funds rate. Cyree, Griffiths, and Winters (2003) identified calendar day effects using the overnight London interbank offer

This paper investigates the extent of arbitrage apparent in overnight interbank markets, expanding on previous work on markets for brokered federal funds, Eurodollars, and repurchase agreements by developing a new time series importantly representing direct (nonbrokered) trades of federal funds. We find evidence of close but incomplete arbitrage among these four major market segments, though the specific calendar-day patterns of spreads and volatilities differ from those reported in earlier studies. The divergences in interest rates do not necessarily represent unrealized profit opportunities, however, as calendar-related transaction costs or other market frictions may account for the apparent incompleteness of arbitrage. Published by Elsevier Inc. JEL classification: E4; G1

This paper investigates transactions and interest rates on brokered and direct trades in federal funds, Eurodollar transactions, and repurchase agreements, all of which are used by banks in overnight funding. We expand on earlier work on calendar-day effects in these markets, investigating also volumes of funding in recent years. Our data include daily trades in federal funds reported by major brokers and also records of uncollateralized transactions over the wire transfer system operated by the Federal Reserve. We find that the share of the overnight interbank loan market represented by brokered fed funds has decreased and is now only about one-third of the total. We also show evidence of close but incomplete arbitrage among the major segments of the overnight interbank market, though the specific calendarday patterns of spreads and volatilities have evolved relative to the literature using earlier sample periods. Overnight Interbank Loan Markets