March 2007 issue contents
Manipulation in Money Markets

by Christian Ewerharta, Nuno Cassolab, Steen Ejerskovc and Natacha Vallad 


Interest rate derivatives are among the most actively traded financial instruments in the main currency areas. With values of positions reacting immediately to the underlying index of daily interbank rates, manipulation has become an increasing challenge for the operational implementation of monetary policy. To address this issue, we study a microstructure model in which a commercial bank may have strategic recourse to central bank standing facilities. We characterize an equilibrium in which market rates will be manipulated with strictly positive probability. Our findings have an immediate bearing on recent developments in the sterling and euro money markets. 

JEL Codes: D84, E52.

Full article (PDF, 36 pages 422 kb)

a University of Zurich
b European Central Bank
c Danmarks Nationalbank
d Banque de France