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Structural distortions in the Euro interbank market: The role of ‘key players’ during the recent market turmoil

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  • C. Liberati
  • M. Marzo
  • P. Zagaglia
  • P. Zappa

Abstract

We study the frictions in the patterns of trades in the Euro money market. We characterize the structure of lending relations during the period of recent financial turmoil. We use network-topology method on data from overnight transactions in the Electronic Market for Interbank Deposits (e-Mid) to investigate on two main issues. First, we characterize the division of roles between borrowers and lenders in long-run relations by providing evidence on network formation at a yearly frequency. Second, we identify the ‘key players’ in the marketplace and study their behaviour. Key players are ‘locally-central banks’ within a network that lend (or borrow) large volumes to (from) several counterparties, while borrowing (or lending) small volumes from (to) a small number of institutions. Our results are twofold. We show that the aggregate trading patterns in e-Mid are characterized by largely asymmetric relations. This implies a clear division of roles between lenders and borrowers. Second, the key players do not exploit their position of network leaders by imposing opportunistic pricing policies. We find that only a fraction of the networks composed by big players are characterized by interest rates that are statistically different from the average market rate throughout the turmoil period.

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Paper provided by Dipartimento Scienze Economiche, Universita' di Bologna in its series Working Papers with number wp841.

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Date of creation: Jul 2012
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Handle: RePEc:bol:bodewp:wp841

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  1. Iori, Giulia & De Masi, Giulia & Precup, Ovidiu Vasile & Gabbi, Giampaolo & Caldarelli, Guido, 2008. "A network analysis of the Italian overnight money market," Journal of Economic Dynamics and Control, Elsevier, vol. 32(1), pages 259-278, January.
  2. Paolo Zagaglia, 2010. "Informed Trading in the Euro Money Market for Term Lending," Working Paper Series 02_10, The Rimini Centre for Economic Analysis.
  3. de Masi, G. & Iori, G. & Caldarelli, G., 2006. "A fitness model for the Italian interbank money market," Working Papers 06/08, Department of Economics, City University London.
  4. Bech, Morten L. & Atalay, Enghin, 2008. "The topology of the federal funds market," Working Paper Series 0986, European Central Bank.
  5. Idier, Julien & Nardelli, Stefano, 2008. "Probability of informed trading on the euro overnight market rate: an update," Working Paper Series 0987, European Central Bank.
  6. Julien Idier & Stefano Nardelli, 2011. "Probability of informed trading on the euro overnight market rate," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 16(2), pages 131-145, 04.
  7. Ana Babus, 2007. "The Formation of Financial Networks," Working Papers 2007.69, Fondazione Eni Enrico Mattei.
  8. Soramäki, Kimmo & Bech, Morten L. & Arnold, Jeffrey & Glass, Robert J. & Beyeler, Walter E., 2007. "The topology of interbank payment flows," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 379(1), pages 317-333.
  9. Heider, Florian & Hoerova, Marie & Holthausen, Cornelia, 2010. "Liquidity Hoarding and Interbank Market Spreads: The Role of Counterparty Risk," CEPR Discussion Papers 7762, C.E.P.R. Discussion Papers.
  10. Ozsoylev, Han N. & Walden, Johan, 2011. "Asset pricing in large information networks," Journal of Economic Theory, Elsevier, vol. 146(6), pages 2252-2280.
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