Hostname: page-component-7c8c6479df-24hb2 Total loading time: 0 Render date: 2024-03-29T12:58:28.143Z Has data issue: false hasContentIssue false

The Micromechanics of the Federal Funds Market: Implications for Day-of-the-Week Effects in Funds Rate Variability

Published online by Cambridge University Press:  06 April 2009

Abstract

The federal funds rate arguably is the most important interest rate in the U.S. capital market because it plays a central role in monetary policy and the term structure. This paper examines the micromechanics of the funds market. We show that in a continuous market with asynchronous trading, regulatory constraints and accounting conventions that focus agents' attention on discrete time instants have important implications for the dynamics of trading activity and realized market prices. We also exhibit a model of the market that explains observed regularities in the intertemporal behavior of the funds rate.

Type
Research Article
Copyright
Copyright © School of Business Administration, University of Washington 1988

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Constantinides, G. M., and Richard, S. F.. “Existence of Optimal Simple Policies for Discounted Cost Inventory and Cash Management in Continuous Time.” Operations Research, 26 (0708. 1978), 620636.CrossRefGoogle Scholar
Garbade, K. D.; Lopez-Brito, J.; and Melton, W.. “Federal Funds: Efficiency of a Market for a ‘Perishable’ Asset.” Mimeo, New York University (1982).Google Scholar
Garman, M.Market Microstructure.” Journal of Financial Economics, 3 (06 1976), 257275.CrossRefGoogle Scholar
Ho, T., and Saunders, A.. “A Micro Model of the Federal Funds Rate.” Journal of Finance, 40 (07, 1985), 977986.CrossRefGoogle Scholar
Hoffmeister, J. R., and Dyl, E.. “Efficiency and Volatility in the Federal Funds Market.” Journal of Bank Research, 15 (Winter 1985), 234239.Google Scholar
Melton, W.Inside the Fed. Homewood, IL: Dow Jones-Irwin (1985).Google Scholar
Parkinson, M. “The Extreme Value Method for Estimating the Variance of the Rate of Return.” Journal of Business, 53 (01 1980), 6166.CrossRefGoogle Scholar
Saunders, A., and Urich, T.. “The Effects of Shifts in Monetary Policy and Reserve Accounting Regimes on Bank Reserve Management Behavior in the Federal Funds Market.” Unpubl. manuscript, New York Univ. (1986).Google Scholar
Snedecor, G. W., and Cochrane, W. G.. Statistical Methods (7th ed.). Ames, IA: Univ. of Iowa Press (1980).Google Scholar
Spindt, P.Discussion of Ho and Saunders.” Journal of Finance, 40 (07 1985), 987990.CrossRefGoogle Scholar
Spindt, P., and Tarhan, V.. “The Federal Reserve's New Operating Policy: A Post Mortem.” Journal of Monetary Economics, 19 (01 1987), 107123.CrossRefGoogle Scholar
Stigum, M.The Money Market. Homewood, IL: Dow Jones-Irwin (1983).Google Scholar
Vickson, R. G.Simple Optimal Policy for Cash Management: The Average Balance Requirement Case.” Journal of Financial and Quantitative Analysis, 20 (09. 1985), 353369.CrossRefGoogle Scholar