New Economics Papers
on Market Microstructure
Issue of 2009‒07‒11
two papers chosen by
Thanos Verousis

  1. Precautionary reserves and the interbank market By Adam Ashcraft; James McAndrews; David Skeie
  2. Verification of selected market microstructure hypotheses for a Warsaw Stock Exchange traded stock By Piotr Or³owski

  1. By: Adam Ashcraft; James McAndrews; David Skeie
    Abstract: Liquidity hoarding by banks and extreme volatility of the fed funds rate have been widely seen as severely disrupting the interbank market and the broader financial system during the 2007-08 financial crisis. Using data on intraday account balances held by banks at the Federal Reserve and Fedwire interbank transactions to estimate all overnight fed funds trades, we present empirical evidence on banks' precautionary hoarding of reserves, their reluctance to lend, and extreme fed funds rate volatility. We develop a model with credit and liquidity frictions in the interbank market consistent with the empirical results. Our theoretical results show that banks rationally hold excess reserves intraday and overnight as a precautionary measure against liquidity shocks. Moreover, the intraday fed funds rate can spike above the discount rate and crash to near zero. Apparent anomalies during the financial crisis may be seen as stark but natural outcomes of our model of the interbank market. The model also provides a unified explanation for several stylized facts and makes new predictions for the interbank market.
    Keywords: Bank reserves ; Federal funds rate ; Interbank market ; Liquidity (Economics)
    Date: 2009
  2. By: Piotr Or³owski (Department of Applied Econometrics, Warsaw School of Economics)
    Abstract: This paper uses a restricted factor model to estimate the HICP index excluding relative prices changes. The index thus obtained, hereinafter referred to as pure inflation, demonstrates stronger relationship to This paper analyses the properties of the transaction process for the most liquid stock traded at the Warsaw Stock Exchange, namely Bioton (ISIN: PLBIOTN00029), in the light of market microstructure theory. The Autoregressive Conditional Duration and Autoregressive Conditional Multinomial models are estimated for the transaction process. Estimation results are interpreted in favour or against market microstructure hypotheses. Tests are conducted for the ACD models in order to assess their fit to the data and in order to search for ways of improving fit. The article is a follow-up of research by Bien [1].
    Keywords: intertrade durations, ACD model, ACM model, market microstructure
    JEL: C32 C59 G14
    Date: 2009–06–28

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