We extend the Spindt and Hoffmeister (1988) model of the daily operation of an institution's federal reserve account to show strong inter-and intra-period incentives to borrow and lend in the federal funds market at predictable points in the 10 trading day settlement period. Using intraday high and low prices, we demonstrate changes in the federal funds rate consistent with our model's predictions. We provide evidence of predictable changes in the variance of Fed funds returns on a daily and intraday basis. Our analysis confirms that Federal Reserve requirements result in daily and intraday variances which are not constant.
- Federal funds
- Financial institutions