Implicit intraday interest rate in the UK unsecured overnight money market

Abstract

This paper estimates the intraday value of money implicit in the UK unsecured overnight money market. Using transactions data on overnight loans advanced through the UK large value payments system CHAPS in 2003-2009, we find a positive and economically significant intraday interest rate. While the implicit intraday interest rate is quite small pre-crisis, it increases more than tenfold during the financial crisis of 2007-2009. The key interpretation is that an increase in implicit intraday interest rate reflects the increased opportunity cost of pledging collateral intraday and can be used as an indicator to gauge the stress of the payment system. We obtain qualitatively similar estimates of the intraday interest rate by using quoted intraday bid and offer rates and confirm that our results are not driven by the intraday variation in the bid-ask spread.

The Role of Counterparty Risk in CHAPS Following the Collapse of Lehman Brothers

“…Although the Libor spread captures the cost of unsecured overnight lending, this is strongly correlated with the cost of intraday secured lending (see Jurgilas and Zikes 2012), which is the rate that matters in our case.…”

“…during the most intense period of the financial crisis, the cost of obtaining intraday liquidity in sterling rose more than tenfold compared to the pre-crisis levels (see Jurgilas and Zikes 2012). The cost of intraday liquidity reflected banks' increased opportunity cost of repoing collateral intraday with the Bank of England and thus the increased cost of funding outgoing payments.…”

The short-term Danish interbank market before, during and after the financial crisis

“…Data based on a Furfine-style algorithm have also been used for studies on e.g. trading networks and interconnectedness (Bech and Rørdam, 2009;Bech and Atalay, 2010), liquidity demand (Acharya and Merrouche, 2013), the bargaining power of lenders and borrowers (Ashcraft and Duffie, 2007;Allen et al, 2012), the presence of calendar-day effects, market segmentation and the degree of arbitrage (Demiralp et al, 2006;Kraenzlin and Nellen, 2015), contagion risk in the interbank market (Amundsen and Arnt, 2005), derivation of intra-day interest rates and turnoverbased measures of overnight interest rates (Akram and Christophersen, 2013a;Jurgilas and Žikeš, 2014) and the effect on interest rates of liquidity, systemic importance, financial turbulence and counterparty risk (Jørgensen et al, 2011;Afonso et al, 2011;Abbassi et al, 2015;Jensen and Korsgaard, 2015;de Andoain et al, 2014).…”

What Can We Learn From the Implementation of Monetary and Macroprudential Policies: A Systematic Literature Review

“…In combination with monetary policy, a central bank can explore the trade‐off effects of liquidity constraints against the increases in priority afforded by collateralization (Lacker, ; Kahn and Roberds, ). In addition, a surge in the implicit intraday interest rate suggests an increased opportunity cost of pledging collateral intraday, and can be used as an indicator to measure the pressure in the payment system (Jurgilas and Žikeš, ).…”