Overnight interbank loan markets

This paper investigates the extent of arbitrage apparent in overnight interbank markets, expanding on previous work on markets for brokered federal funds, Eurodollars, and repurchase agreements by developing a new time series importantly representing direct (nonbrokered) trades of federal funds. We find evidence of close but incomplete arbitrage among these four major market segments, though the specific calendar-day patterns of spreads and volatilities differ from those reported in earlier studies. The divergences in interest rates do not necessarily represent unrealized profit opportunities, however, as calendar-related transaction costs or other market frictions may account for the apparent incompleteness of arbitrage. Published by Elsevier Inc.