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Informed trading in the Euro money market for term lending

Paolo Zagaglia

MPRA Paper from University Library of Munich, Germany

Abstract: I address the role of information heterogeneity in the Euro interbank market for unsecured term lending. I use high-frequency quotes of bid and ask prices to estimate probabilities of informed trading for contract maturities from one month to one year. The dataset spans from November 2000 to March 2008, and includes the relevant events that characterize the developments of the Euro area money market. I obtain four main results. First, I show that the loose supply of liquidity of the ECB has not dampened the distortions arising from asymmetric information in the unsecured money market. I also find that the probability of trading with a better informed bank is higher on days when open market operations take place, and at the end of the maintenance period. This effect has strengthened during the turmoil. The results indicate that information is segmented, in the sense that heterogenous knowledge among banks is maturity-specific. Finally, the paper presents some evidence suggesting that the risk of trading with a counterparty that enjoys an enhanced information set is priced.

Keywords: Market microstructure; PIN model; money markets; term structure (search for similar items in EconPapers)
JEL-codes: G14 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-cta, nep-eec, nep-mac, nep-mon and nep-mst
Date: 2010-02-03
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Working Paper: Informed Trading in the Euro Money Market for Term Lending (2010) Downloads
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