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Money market integration

Author

Listed:
  • Leonardo Bartolini
  • R. Spence Hilton
  • Alessandro Prati
Abstract
We use transaction-level data and detailed modeling of the high-frequency behavior of federal funds-Eurodollar yield spreads to provide evidence of strong integration between the federal funds and Eurodollar markets, the two core components of the dollar money market. Our results contrast with previous research indicating that these two markets are segmented, showing them to be well integrated even at high (intraday) frequency. We document several patterns in the behavior of federal funds-Eurodollar spreads, including liquidity effects from trading volume on yield spreads' volatility. Our analysis supports the view that targeting federal funds rates alone is sufficient to stabilize rates in the (much larger) dollar money market as a whole.

Suggested Citation

  • Leonardo Bartolini & R. Spence Hilton & Alessandro Prati, 2005. "Money market integration," Staff Reports 227, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:227
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    References listed on IDEAS

    as
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    Cited by:

    1. Roc Armenter & Benjamin Lester, 2017. "Excess Reserves and Monetary Policy Implementation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 23, pages 212-235, January.
    2. Lawrence L Kreicher & Robert N McCauley & Patrick McGuire, 2013. "The 2011 FDIC assessment on banks managed liabilities: interest rate and balance-sheet responses," BIS Working Papers 413, Bank for International Settlements.
    3. Benjamin Lester & Roc Armenter, 2015. "Excess Reserves and Monetary Policy Normalization," 2015 Meeting Papers 586, Society for Economic Dynamics.
    4. Fukuda, Shin-ichi, 2012. "Market-specific and currency-specific risk during the global financial crisis: Evidence from the interbank markets in Tokyo and London," Journal of Banking & Finance, Elsevier, vol. 36(12), pages 3185-3196.
    5. Linda S. Goldberg & Michael W. Klein, 2005. "Establishing Credibility: Evolving Perceptions of the European Central Bank," NBER Working Papers 11792, National Bureau of Economic Research, Inc.
    6. Fassas, Athanasios P., 2021. "Price discovery in US money market benchmarks: LIBOR vs. SOFR," Economics Letters, Elsevier, vol. 204(C).
    7. Bartolini, Leonardo & Hilton, Spence & McAndrews, James J., 2010. "Settlement delays in the money market," Journal of Banking & Finance, Elsevier, vol. 34(5), pages 934-945, May.
    8. Bech, Morten L. & Klee, Elizabeth, 2011. "The mechanics of a graceful exit: Interest on reserves and segmentation in the federal funds market," Journal of Monetary Economics, Elsevier, vol. 58(5), pages 415-431.
    9. R. Spence Hilton & Warren B. Hrung, 2007. "Reserve levels and intraday federal funds rate behavior," Staff Reports 284, Federal Reserve Bank of New York.
    10. Xu, Xiaoqing Eleanor, 2021. "Dissecting the segmentation of China's repo markets," Pacific-Basin Finance Journal, Elsevier, vol. 70(C).

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    Keywords

    Euro-dollar market; Liquidity (Economics); Federal funds market (United States);
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