The Turn of the Month Effect of China's Repo Market: Evidence, Causes and Policy Implications
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Kai Li
Interest rate liberalization is a key element of China’s financial sector reform. As one of the largest and most liquid money market instruments in China, the repurchase agreement (repo) market provides the best information about the market-driven short-term interest rates. In this study, we document a salient turn of the month effect of China exchange-traded overnight repo rates, that is, temporary but significant increases in both the level and volatility of the overnight repo rates at the end of each month. We plan to further provide empirical evidence to attribute such an effect to the month-end institution liquidity needs. We also emphasize a better understanding of this effect contains important policy implications on central bank’s liquidity management and on measures toward an efficiently functioning money market.
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