Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/19759
Authors: 
Hakenes, Hendrik
Fecht, Falko
Year of Publication: 
2006
Series/Report no.: 
Discussion Paper, Series 2: Banking and Financial Supervision 2006,12
Abstract: 
Money markets have two functions, the allocation of liquidity and the processing of information. We develop a model that allows us to evaluate the efficiency of different money market derivatives regarding these two objectives. We assume that due to its size, a large bank receives a more precise signal about the overall liquidity development in the banking sector. In an upcoming liquidity shortage this large bank can exploit its informational advantage in the spot money market by rationing liquidity. Using forward contracts, the large bank can credibly commit not to squeeze small banks in the event of a liquidity shortage. But forward contracts do not provide incentives for the large bank to pass on its information to other banks. In contrast, lines of credit between the large and the small banks ensure that the large bank provides its information to other banks.
Subjects: 
Liquidity
money market derivatives
lines of credit
forward contracts
options
JEL: 
G33
G21
D82
Document Type: 
Working Paper

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