Hartmann, Manna And Manzanares-The Microstructure Of The Euro Money Market

This paper provides an empirical examination of the microstructure of the euro money market, especially the overnight market, the interbank market for short-term funds in the transnational currency created in January 1999. The institutional framework shaping the microstructure of the money market can be delimited as the union of: central banks’ interest-setting bodies and their long-term policy strategy;instruments for monetary policy operations and liquidity management;the private market financial instruments and trading mechanismsfor funds;  and, (4) the payment and settlement infrastructure for the transfer of those funds.All four elements can  significantly influence the intraday behaviour of money market rates.To study their effects on the euro money market, 5 months of intraday data for overnight deposits have been recorded from brokers in four euro area countries and the UK (posting their quotes on Reuters) and from the Italian electronic market MID. The results show “twohump”shaped (or “u”-shaped) intraday patterns of quoting frequency and volatility, but flatterintraday patterns (sometimes weakly single hump”-shaped) for bid-ask spreads. E

ven intraday overnight rate levels hardly differ across brokers located in different euro area countries,reflecting the high integration of this market already shortly after the introduction of the euro,despite some remaining heterogeneities in market structures and trading channels. Quoting activity, rate volatility and spreads increase on ECB Governing Council days, particularly afterthe 1.45 pm release time of interest rate decisions. However, since the amplitude of this volatilityis economically small and since turnovers are not indicative of adverse selection, the average degree of policy uncertainty seems to have been rather limited during our sample period. ECB announcements of new M3 data, related to the first pillar of its monetary policy strategy, around 10am seem to be associated with very moderate increases in short-term volatility.Tuesdays’ Eurosystem main refinancing auctions with the open market exhibit active pre- and post-auction liquidity re-allocation, but only a very short and moderate increase in volatility after the announcement of the allotments and no signs of market power or adverseselection. Open market operation settlement days exhibit the highest turnovers during the busi-ness week, at least for the MID, without, however, being affected by any special risks. Finally,it is shown that spreads and volatility tend to be very high at the end of the minimum reservemaintenance period and that the same happened during the year 2000 changeover days,reflecting the high risks involved in both. 2001 Elsevier Science Ltd. All rights reserved.