Griffiths and Winters (1995) suggest that the rules and regulations of the bank settlement process create incentives such that banks optimizing their reserve account management will borrow on settlement Wednesday to obtain the funds necessary to meet Federal Reserve Board mandated reserves. We develop a trading rule for settlement Winesday that reduces the cost of borrowing by exploiting the predicted daily trading behavior of the Federal Reserve Open Market Desk. The strategy reduces the cost of borrowing by approximately $43,333 per $1 billion on an annualized basis in simulated trading. Our results reinforce that optimal reserve account management is a function of the rules and regulations governing overnight money markets.
|Number of pages||18|
|Journal||Quarterly Review of Economics and Finance|
|State||Published - Jun 1 1999|