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Liquidity Networks, Interconnectedness, and Interbank Information Asymmetry

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Abstract

Network analysis has demonstrated that interconnectedness among market participants results in spillovers, amplifies or absorbs shocks, and creates other nonlinear effects that ultimately affect market health. In this paper, we propose a new directed network construct, the liquidity network, to capture the urgency to trade by connecting the initiating party in a trade to the passive party. Alongside the conventional trading network connecting sellers to buyers, we show both network types complement each other: Liquidity networks reveal valuable information, particularly when information asymmetry in the market is high, and provide a more comprehensive characterization of interconnectivity in the overnight-lending market.

Suggested Citation

  • Celso Brunetti & Jeffrey H. Harris & Shawn Mankad, 2021. "Liquidity Networks, Interconnectedness, and Interbank Information Asymmetry," Finance and Economics Discussion Series 2021-017, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2021-17
    DOI: 10.17016/FEDS.2021.017
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    More about this item

    Keywords

    Banking networks; Interconnectedness; Liquidity;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General

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