The Federal funds market and the overnight Eurodollar market

This paper investigates the effect of daily management of Federal Reserve accounts by US depository institutions on the interest rate outside the US. Spindt and Hoffmeister (Journal of Financial and Quantitative Analysis 23 (1988) 401), Griffiths and Winters (Journal of Banking and Finance 19 (1995) 1265) and Hamilton (Journal of Political Economy 104 (1996) 22) found that the Fed funds rate exhibited calendar day effects caused by Federal Reserve regulations. I find that the overnight Eurodollar rate shows similar predictable daily changes as does the Fed funds rate although the absolute magnitudes are slightly less. The empirical results support the hypothesis that the tendencies in daily changes in the two overnight interest rates are caused by the characteristics of the Fed funds market. (C) 2003 Elsevier Science B.V. All rights reserved.