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ABSTRACT. In completely integrated financial markets, securities with identical risk command the same expected return irrespective of the market of trading; barriers to international capital flows exist that can cause segmentation of capital markets along national boundaries. If banks expect the funds rate to be higher tomorrow, and funds are perfectly substitutable across days, there is an incentive to bid aggressively for the funds rate today in order to avoid borrowing funds when interest rate are expected to be high.

 

ELENA DIACONU
 
 
 

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