Comments on “Segmentation inthe U.S. Dollar Money Markets
During the Financial Crisis
By
Shin-ichi Fukuda(University of Tokyo)
1Motivation of this paper• The U.S. dollar unsecured money market
consists of two segments, Eurodollar
deposits and federal funds purchases andsales.
• The two market segments were highly
integrated in normal times.
• Were the two market segments highly
integrated during the Financial Crisis?
2

Two types of Eurodollar rates• (1) Libor rate reflecting rates in London
during the London trading session.
• (2) Eurodollar rate reflecting trades
arranged in New York during its trading
session.
• This paper tracks the different behavior of
the New York and London Eurodollarmarket.
3

Main results• The crisis period caused significant disintegration of the market segments,
especially in the post Lehman Brothers
Bankruptcy period.
• In the Eurodollar deposits, the New York
market is more closely integrated with thefederal funds market segment than theLondon market, especially during crisis
periods.
⇒ Very important contributions!
4Libor Dollar (1 week)
Libor Dollar (1 month)01/28/2009

12/18/2008

10/02/2008
11/10/2008

08/26/2008

07/21/2008

2008/05/06
2008/06/12

2008/03/31

2008/02/22

2007/12/06
2008/01/15

2007/09/20
2007/10/29

2007/08/14

2007/07/09

2007/04/24
2007/05/31

2007/03/19

2007/02/08%

2007/01/02

Divergence between Libor and FF rate
7

6

5

4

3

2

1

0

DAILY FF rate5

Why disintegration between
New York and London?
(1) The time zone mismatch.
• Different shocks for different time zones.
• Especially, the implementation of US
dollar open market operations only during
the trading day in NY.
• This would have the effect of lowering
New York session rates, both Euro andfederal funds during the crisis.
6

Why disintegration between
New York and London?
(2) The greater geographic distance toLondon• The greater distance may impede theformation of relationships and therevelation of information conductive totrading.
• Bigger uncertainty and larger noise tradersin London.
7

Why disintegration between
New York and London?
(3) Different counterparties in the different
geographic areas.
• Different risk premiums• Different liquidity risks8divergence within the federal fundsmarket segment• But we also need to note that there havebeen heterogeneity even within the federal
funds market segment.
• Before the crisis, the divergence was small
within the federal funds market segment.
• The crisis period caused significant
divergence of interest rates even within
the federal funds market segment.
9

Two reasons of heterogeneity
in intraday FF rates(1) different transaction timings.
• Reflecting unanticipated news, the market
interest rates change every second during theday.
⇒Different FF rates are realized at different times.
(2) heterogeneous market participants.
• Different market participants may face different
risk premiums.
⇒ Different FF rates are realized even if they
make transactions at the same time.
102007/01/02
2007/01/09
2007/01/17
2007/01/24
2007/01/31
2007/02/07
2007/02/14
2007/02/22
2007/03/01
2007/03/08
2007/03/15
2007/03/22
2007/03/29
2007/04/05
2007/04/12
2007/04/19
2007/04/26
2007/05/03
2007/05/10
2007/05/17
2007/05/24
2007/06/01
2007/06/08
2007/06/15
2007/06/22
2007/06/29

Before the crisis

16
14
12
10
8
6
4
20

DAILY FF rate
INTRADAY LOWINTRADAY HIGH11

DAILY FF rate
INTRADAY LOW

2007/11/28

2007/11/20

2007/11/13

2007/11/05

2007/10/29

2007/10/22

2007/10/15

2007/10/05

2007/09/28

2007/09/21

2007/09/14

2007/09/07

2007/08/30

2007/08/23

2007/08/16

2007/08/09

2007/08/02

2007/07/26

16
14
12
10
8
6
4
20
2007/07/19

2007/07/12

2007/07/05

After August 9th 2007
Aug 9, 2007
start of financial
turmoil

INTRADAY HIGH
12

divergence in intraday FF rates• After August 9th, 2007, downward
divergence became conspicuous.
• In the first half of 2008, frequent upward
spikes as well as persistent downward
divergence happened.
• After the Lehman failure, large persistent
upward divergence as well as persistent
downward divergence became
conspicuous.
13

DAILY FF rate
INTRADAY LOW

2008/05/23

2008/05/16

2008/05/09

2008/05/02

2008/04/25

2008/04/18

2008/04/11

2008/04/04

2008/03/28

2008/03/21

2008/03/14

2008/03/07

2008/02/29

16
14
12
10
8
6
4
20
2008/02/22

2008/02/14

2008/02/07

2008/01/31

2008/01/24

2008/01/16

2008/01/09

2008/01/02

In the first half of 2008
March 15, 2008
Bailout of Bear
Stearns

INTRADAY HIGH

14

DAILY FF rate
INTRADAY LOW

10/27/2008

10/17/2008

10/08/200809/30/2008

09/22/2008

09/12/2008

09/04/2008

08/26/2008

16
14
12
10
8
6
4
2
0
08/18/2008

08/08/2008

07/31/2008

07/23/2008

07/15/2008

07/07/2008

2008/06/26

2008/06/18

2008/06/10

2008/06/02

Before and after the Lehman failure
Sep,15, 2008
Lehman failure

INTRADAY HIGH

15

Some similarities between FF rateand Libor before and after the crisis• Before the crisis, Libor was very similar todaily average of FF rate.
• After August 2007, Libor became larger
than daily average of FF rate but was still
lower than intraday highest FF rate.
• After March 2008, Libor became very
similar to intraday highest FF rate (10 day
moving average of intraday highest rate
after removing some spikes).
16

Libor dollar (1 month)
DAILY FF rate
2007/07/27

2007/07/17

2007/07/05

2007/06/22

2007/05/31
2007/06/12

2007/05/18

2007/05/08

2007/04/16
2007/04/26

2007/04/04

2007/03/23

2007/03/13

2007/03/01

2007/02/16

2007/01/25
2007/02/06

2007/01/12

2007/01/02

Before the crisis

6.5

6

5.5

5

4.5

4

INTRADAY HIGH (MA)17

Libor dollar (1 month)
DAILY FF rate

2007/12/28

2007/12/19

2007/12/11

2007/12/03

2007/11/23

2007/11/14

2007/11/05

2007/10/26

2007/10/18

2007/10/10

2007/10/01

2007/09/21

2007/09/13

2007/09/05

2007/08/27

2007/08/17

2007/08/09

2007/08/01

After August 2007

6.5

6

5.5

5

4.5

4

INTRADAY HIGH (MA)18

Libor dollar (1 month)
INTRADAY HIGH (MA)08/19/2008

08/05/2008

07/22/2008

07/08/2008

2008/06/23

2008/06/09

2008/05/23

2008/05/09

2008/04/25

2008/04/11

2008/03/28

2008/03/14

2008/02/29

2008/02/14

2008/01/31

2008/01/16

2008/01/02

In the first half of 2008

54.5
4
3.5
3
2.5
2
1.5

DAILY FF rate

19

Some similarities between FF rateand Libor after the crisis• After the Lehman failure, Libor temporarily
exceeded intraday highest FF rate (10 day
moving average).
• Since early November 2008, Libor became
lower than intraday highest FF rate. The
expansion of FX swaps in October 2008
might have helped in improving US dollar
liquidity in London.
20

Libor dollar (1 month)
INTRADAY HIGH (MA)
01/30/2009

01/22/2009

01/13/2009

01/05/2009

12/24/2008

12/16/2008

12/08/2008

11/28/2008

11/19/2008

11/10/2008

10/31/2008

Sep,15, 2008
Lehman failure

10/23/2008

10/15/2008

10/06/2008

09/26/2008

09/18/2008

6543
2
10
09/10/2008

09/02/2008

Before and after the Lehman failure
Oct 15, 2008
expansion of FX swaps

DAILY FF rate21

Some tentative conjectures• Before the crisis, average counterparty risk in
Libor dollar was similar to average counterparty
risk in FF rate.
• The crisis made average counterparty risk in
Libor dollar larger than average in FF rate.
• Since March 2008, average counterparty in Libor
dollar market became close to the riskiest
counterparty in FF market segment.
• The expansion of FX swaps in October 2008
might have helped in improving averagecounterparty risk in Libor dollar.
22