اثرات مدیریت انبار، ایزوله: شواهدی از بازار بودجه فدرال

The federal funds market is highly competitive, has uniform information, and does not have most order-processing cost components of equity markets. Hence, it provides an opportunity to study the effect of inventory management on the bid-ask spread in an isolated fashion. Using a unique data set of daily borrowing and lending federal funds quotes posted by a large commercial bank, we find that the bank maintains a fairly constant bid-ask spread throughout a two-week reserve maintenance period. It acts similarly to a market maker facilitating flow of funds between depository institutions throughout the reserve maintenance period. The bank becomes more active toward the end of the period. In particular, on settlement Wednesday it increases the bid and ask quotes relative to the effective federal funds rate in an apparent attempt to manage its reserve inventory and satisfy its own reserve requirements.

Determinants of the bid-ask spread in financial markets discussed in the literature fall into four major categories: inventory management, informational asymmetry, order-processing costs, and competition among market makers.1 The federal funds market, where depository institutions trade their reserve balances, has some similarities to exchange markets. However, there are also significant differences. First of all, this market is highly efficient and information is largely uniform. Second, most of the components of order-processing costs in exchange markets, such as an exchange seat price, floor space rent, and informational service cost are not present in the federal funds market. Third, the competitive factor is relatively uniform across the entire market since many institutions engage in facilitation of short-term lending and borrowing between depositories. At the same time, depository institutions in the U.S. must satisfy reserve requirements imposed by the Federal Reserve, which creates the need to manage inventories of reserves. Spindt and Hoffmeister (1988) and Griffiths and Winters (1995) both suggest that the main explanation of the behavior of the federal funds rate is reserve management by depository institutions. Overall, the federal funds market provides a unique environment where the effect of inventory management on the bid-ask spread could be studied in an isolated fashion. Using a unique data set of daily borrowing (bid) and lending (ask) quotes posted by a large Midwestern U.S. bank trading federal funds for its own account, we study how the quotes and the spread between them evolve throughout the reserve maintenance period. In particular, we examine if and how inventory management necessitated by the federal funds market structure affects the bid-ask spread. To our knowledge, this is the first study that directly investigates the bid-ask spread in the federal funds market. We find that the bank maintains a relatively stable bid-ask spread throughout the two-week reserve maintenance period, with the bid and ask quotes mimicking a brokered transaction-weighted market rate. The bank increases both bid and asks relative to the effective federal funds rate as settlement approaches. This behavior is consistent with the bank maximizing profits and helping to facilitate orderly flow of funds between depository institutions throughout most of the two-week reserve maintenance period while focusing more on its own reserve inventory management through additional borrowing toward the end of the period. The paper proceeds as follows. The next section provides essential details of the federal funds market and discusses inventory management in the federal funds market. The following section describes data and methods, Section 4 reports and discusses empirical results, and the last section concludes.

Among the four components of the bid-ask spread discussed in the literature – order-processing costs, inventory management, asymmetric information, and competition among market makers – only inventory management can play a major role in the federal funds market due to its structure. Depository institutions are forced to manage their reserves on a regular basis; they have to achieve an optimal level of reserves every other Wednesday (settlement Wednesday). Thus, the federal funds market's unique structure allows to isolate the impact of inventory management on the bid-ask spread from the impact of other factors. Analyzing a unique data set of bid and ask quotes of a large commercial bank that actively trades federal funds for its own account, we find that the bank maintains a fairly constant bid-ask spread throughout a two-week reserve maintenance period. The bank becomes more active toward the end of the period. In particular, on settlement Wednesday it raises the bid quote and, to a lesser extent, the ask quote relative to the brokered transaction-weighted effective federal funds rate. It suggests that the bank prefers to manage its inventory by more actively adjusting the borrowing rate. It is consistent with the federal funds market being affected by depository institutions’ inventory management on settlement Wednesdays. The changes in the bid and ask quotes of the bank around non-trading days are consistent with the pattern previously documented in the literature. Overall, our findings suggest that the bank acts similarly to a market maker who maintains orderly flow of funds throughout the reserve maintenance period. The bank's own reserve management considerations prompt it to borrow funds at a higher rate and discourage borrowing from it by other institutions by setting a higher ask rate (both relative to the effective federal funds rate) on settlement Wednesday.