A Micro Model of the Federal Funds Market

Ho, Thomas S. Y.; Saunders, Anthony

doi:10.2307/2327826

Cited by 55 publications

(37 citation statements)

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“…As a consequence, they manage their reserve in a way that they are net lenders, compare Ho and Saunders (1985). Table 2 depicts the number of borrowers and lenders, how often each bank borrowed or lent as well as the respective amounts for banks of different asset sizes.…”

Section: [Insert Table 1 Here]mentioning

confidence: 99%

Relationship Lending in the Interbank Market and the Price of Liquidity

Bräuning

Fecht

2016

Review of Finance

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This paper empirically investigates the effect of interbank relationship lending on banks' access to liquidity. Our analysis is based on German interbank payment data which we use to create a panel of unsecured overnight loans between 1079 distinct borrower-lender pairs. The data shows that banks rely on repeated interactions with the same counterparties to trade liquidity. For the price of liquidity, we find that in the run-up to the recent financial crisis of 2007/08 relationship lenders charged already higher interest rates to their borrowers after controlling for other bank specific characteristics and general market conditions. By contrast, during the crisis borrowers paid on average lower rates to their relationship lenders compared to spot lenders. The observed interest rate differences are statistically and economically significant and in line with theory that relationship lenders have private information about the creditworthiness of their close borrowers.

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Section: [Insert Table 1 Here]mentioning

confidence: 99%

Relationship Lending in the Interbank Market and the Price of Liquidity

Bräuning

Fecht

2016

Review of Finance

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“…These issues have been receiving much attention in policy circles. 27 We perceive a growing need for quantitative models that can be used to explore the effectiveness of the interest rate on reserves as a tool to manage the fed funds rate. In this section we take steps toward meeting this demand.…”

Section: Simulationmentioning

confidence: 99%

“…Previous research on the fed funds market includes the theoretical work of Poole (1968), Ho and Saunders (1985), and Coleman, Gilles, and Labadie (1996), and the empirical work of Hamilton (1996) and Hamilton and Jordà (2002). The over-the-counter nature of the fed funds market was highlighted by Ashcraft and Duffie (2007) in their empirical investigation and used by Bech and Klee (2011), Ennis and Weinberg (2009), and Furfine (2003) to try to explain certain aspects of interbank markets such as apparent limits to arbitrage, stigma, and banks' decisions to borrow from standing facilities.…”

Section: Introductionmentioning

confidence: 99%

Trade Dynamics in the Market for Federal Funds

2015

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We develop a model of the market for federal funds that explicitly accounts for its two distinctive features: banks have to search for a suitable counterparty, and once they meet, both parties negotiate the size of the loan and the repayment. The theory is used to answer a number of positive and normative questions: What are the determinants of the fed funds rate? How does the market reallocate funds? Is the market able to achieve an efficient reallocation of funds? We also use the model for theoretical and quantitative analyses of policy issues facing modern central banks.

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“…Ho and Saunders (1985) focus on the possible risk aversion of banks. Campbell (1987) assumes that liquidity benefits of reserves vary across the days of the reserve maintenance period, for instance due to differing payment system activity.…”

Section: Empirical Studiesmentioning

confidence: 99%