Why does overnight liquidity cost more than intraday liquidity?

Bhattacharya, Joydeep; Haslag, Joseph H.; Martin, Antoine

doi:10.1016/j.jedc.2008.12.001

“…Our model abstracts from these costs. Other papers examining intraday liquidity include Bartolini et al (2010), Bech et al (2010), Bech and Garratt (2003), Bhattacharya et al (2009), Martin (2004), and Martin and McAndrews (2008).…”

mentioning

confidence: 99%

Precautionary Reserves and the Interbank Market

Ashcraft

¹

,

McAndrews

²

,

Skeie

³

2011

J of Money Credit Banking

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractLiquidity hoarding by banks and extreme volatility of the fed funds rate have been widely seen as severely disrupting the interbank market and the broader financial system during the 2007-08 financial crisis. Using data on intraday account balances held by banks at the Federal Reserve and Fedwire interbank transactions to estimate all overnight fed funds trades, we present empirical evidence on banks' precautionary hoarding of reserves, their reluctance to lend, and extreme fed funds rate volatility. We develop a model with credit and liquidity frictions in the interbank market consistent with the empirical results. Our theoretical results show that banks rationally hold excess reserves intraday and overnight as a precautionary measure against liquidity shocks. Moreover, the intraday fed funds rate can spike above the discount rate and crash to near zero. Apparent anomalies during the financial crisis may be seen as stark but natural outcomes of our model of the interbank market. The model also provides a unified explanation for several stylized facts and makes new predictions for the interbank market.

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“…Our model abstracts from these costs. Other papers examining intraday liquidity include Bartolini et al (2010), Bech et al (2010), Bech and Garratt (2003), Bhattacharya et al (2009), Martin (2004, and Martin and McAndrews (2008).…”

mentioning

confidence: 99%

Precautionary Reserves and the Interbank Market

Ashcraft

¹

,

McAndrews²,

Skeie

³

2009

View full text Add to dashboard Cite

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractLiquidity hoarding by banks and extreme volatility of the fed funds rate have been widely seen as severely disrupting the interbank market and the broader financial system during the 2007-08 financial crisis. Using data on intraday account balances held by banks at the Federal Reserve and Fedwire interbank transactions to estimate all overnight fed funds trades, we present empirical evidence on banks' precautionary hoarding of reserves, their reluctance to lend, and extreme fed funds rate volatility. We develop a model with credit and liquidity frictions in the interbank market consistent with the empirical results. Our theoretical results show that banks rationally hold excess reserves intraday and overnight as a precautionary measure against liquidity shocks. Moreover, the intraday fed funds rate can spike above the discount rate and crash to near zero. Apparent anomalies during the financial crisis may be seen as stark but natural outcomes of our model of the interbank market. The model also provides a unified explanation for several stylized facts and makes new predictions for the interbank market.

show abstract

“…But since finality of settlement is generally achieved by settling in central bank liabilities, when lending funds intraday private agents take into consideration the possibility of finding themselves in shortage of the ultimate settlement asset later in the day. In a theoretical model Bhattacharya, Haslag, and Martin (2009) show that central bank provided intraday liquidity is essential to achieve efficiency as private markets for intraday liquidity cannot achieve a socially optimal outcome. Martin (2004) shows that the key policy concern is that free unrestricted intraday liquidity can lead to large credit losses for the central bank.…”

Section: Literaturementioning

confidence: 99%