The Italian Overnight Market: Microstructure Effects, the Martingale Hypothesis and the Payment System

Barucci, Emilio; Impenna, Claudio; Renò, Roberto

doi:10.1016/s1567-7915(04)04013-3

Cited by 9 publications

(17 citation statements)

References 27 publications

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“…This is intuitively due to the fact that banks are constrained in governing the average value required by the central bank as the reserve maintenance period approaches. Barucci et al (2004) and Iori et al (2008) have provided evidence that the interest rate exhibits predictable patterns at the end of the reserve maintenance period, with a consistent decrease reported at the end of the period before 2001, and a consistent increase after 2001. Gaspar et al (2008) showed that market activity intensifies over the reserve maintenance period with the number of trades and the realised volatility of the overnight interest rate reaching a peak on the last day of the period; the imbalance between buy and sell orders decreases markedly over the last days; the market spread follows a similar path with a decrease towards the end of the period.…”

Section: Reserve Requirement Effectmentioning

confidence: 83%

Market microstructure, banks’ behaviour and interbank spreads: evidence after the crisis

Kapar

Iori

Gabbi

et al. 2019

J Econ Interact Coord

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We present a study of the European electronic interbank market of overnight lending (e-MID) before and after the beginning of the financial crisis. The main goal of the paper is to explain the structural changes of lending/borrowing features due to the liquidity turmoil. Unlike previous contributions that focused on banks' dependent and macro information as explanatory variables, we address the role of banks' behaviour and market microstructure as determinants of the credit spreads. We show that all banks experienced significant variations in their liquidity costs due to the sensitivity of interbank rates to the timing and side of trades. We argue that, while larger banks did experience better funding conditions after the crisis, this was not just a consequence of the "too big to fail" perception of the market. Larger banks have been able to play more strategically when managing their liquidity by taking advantage of the changing market microstructure.Interbank markets play a key role in the liquidity management of banks and in the transmission of monetary policy. Well-functioning interbank markets effectively channel liquidity from financial intermediaries with a surplus of funds to those in need, allowing for more efficient financial intermediation. Variations in interbank rates are transmitted to the entire term structure, affecting borrowing conditions for households and firms. Interbank rates provide benchmarks (e.g. the Libor, Euribor and Eonia) for the pricing of fixed-income securities and derivative contracts such as shortterm interest rate futures and interest rate swaps, used by banks to hedge their short-term interest rate risks. Thus, policymakers have an interest in a financial system with an efficient interbank market, that is, one in which the central bank can achieve its desired rate of interest and one that allows institutions to trade liquidity minimizing transaction costs and information asymmetries.Before the crisis, interbank markets were among the most liquid in the financial sector and the literature has historically devoted a relatively low consideration to the interbank market due to the short-term nature of the exchanged deposits. Banks used to accept non-collateralised loans because counterparties were considered safe and sound enough and liquidity risk was perceived as marginal due to the central bank role as lender of last resort. However, during the 2007-2008 financial crisis, liquidity in the interbank market has considerably dried up, even at short maturities. Also an increasing dispersion in the credit conditions of different banks has emerged. These events have triggered a new interest in interbank markets. The dramatic change of volumes and the drop in the number of active banks after the subprime crisis can be hardly explained as a real reduction of liquidity need by banks.

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Section: Reserve Requirement Effectmentioning

confidence: 83%

Market microstructure, banks’ behaviour and interbank spreads: evidence after the crisis

Kapar

Iori

Gabbi

et al. 2019

J Econ Interact Coord

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“…This suggests that final adjustments to liquidity are achieved through a larger number of smaller-volume trades, involving a higher than usual number of counterparties. Barucci et al (2004) interpreted this observation as a sign that banks manage their liquidity efficiently so that on the 5 Note that the statistic used by Cocco et al (2003) is the lender preference index (LPI) (and the corresponding borrower preference index) defined as LPI ¼ ð P 30 t¼1 w l i;j ðtÞÞ=ð P 30 t¼1 s w;l i ðtÞÞ.…”

Section: Resultsmentioning

confidence: 99%

“…They also show that spreads and volatility tend to be very high at the end of the minimum reserve maintenance period. Barucci et al (2004) noticed a decline in exchange volumes and an increase in the number of contracts on the last few days of the maintenance periods. This pattern is shown in Fig.…”

Section: Article In Pressmentioning

confidence: 98%

See 1 more Smart Citation

A network analysis of the Italian overnight money market

Iori

Masi

Precup

et al. 2008

Journal of Economic Dynamics and Control

445

310

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“…Indeed, Angelini (2000) finds no relevant intraday pattern in the level of interest rates for the overnight market in the Italian screen‐based e‐MID interbank market for the period from mid‐1993 to end‐1996. Looking at the same market, Barucci, Impenna, and Renò (2003) find a downward pattern for the period January 1999 to August 2001, and Baglioni and Monticini (2008) find a clear downward pattern for the period 2003–04. For the unsecured U.S. overnight federal funds market, Bartolini, Gudell, and Hilton (2005) find a similar downward pattern for the deviation of an average half‐hourly rate from the target rate in the period from February 2002 to September 2004.…”

Section: Comparisons and Conclusionmentioning

confidence: 95%

Daytime Is Money

Kraenzlin¹,

Nellen²

2010

J of Money Credit Banking

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Based on trade data from the Swiss franc overnight interbank repo market, we gain valuable insights into the daytime value of money. In analogy to Baglioni and Monticini (2008), we provide evidence that an implicit intraday money market exists. We further show that the introduction of foreign exchange settlement system, Continuous Linked Settlement, increased the implicit value of intraday liquidity during settlement cycle hours, thus providing further evidence of the cost of immediacy. Finally, we provide evidence that during the financial market turmoil the implicit intraday interest in a secured money market was less affected than that in an unsecured money market.

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The Italian Overnight Market: Microstructure Effects, the Martingale Hypothesis and the Payment System

Cited by 9 publications

References 27 publications

Market microstructure, banks’ behaviour and interbank spreads: evidence after the crisis

Market microstructure, banks’ behaviour and interbank spreads: evidence after the crisis

A network analysis of the Italian overnight money market

Daytime Is Money

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