Working Paper: CEPR ID: DP3081
Authors: Philipp Hartmann; Michele Manna; Andres Manzanares
Abstract: This Paper provides the first empirical examination of the microstructure of the euro money market, using tick data from brokers located in six countries. Special emphasis is put on the institutional environment (monetary policy decisions and their implementation, payment systems and private market structures) and its implications for intraday volatility, quoting activity, trading volume and bid-ask spreads in the overnight deposit segment. Volatility and spreads increase right after ECB monetary policy decisions, but market expectations of the interest rate changes were relatively precise during the sample period. Main refinancing operations with the open market are associated with active liquidity re-allocation, little volatility and no signs of market power or adverse selection. Spreads and volatility were high at the end of the reserve maintenance periods and during the year 2000 changeover. Even intraday, overnight rate levels hardly differ across euro area countries, reflecting active arbitrage and a high degree of integration.
Keywords: Main refinancing operations; Euro; Financial market microstructure; High frequency data; Liquidity; Money market; Monetary policy instruments; Overnight deposit rates; Payment systems; Reserve requirements; Trading volume; Transaction costs; Volatility
JEL Codes: D44; E43; E52; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| ECB monetary policy decisions (E52) | volatility in the overnight deposit segment (E49) |
| ECB monetary policy decisions (E52) | bid-ask spreads in the overnight deposit segment (E43) |
| main refinancing operations (E52) | active liquidity reallocation (G19) |
| announcement of allotment results (G34) | trading volumes (G15) |
| end of reserve maintenance periods (Q21) | spreads and volatility (C58) |