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Cascades in real interbank markets

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  • Fariba Karimi
  • Matthias Raddant

Abstract

We analyze cascades of defaults in an interbank loan market. The novel feature of this study is that the network structure and the size distribution of banks are derived from empirical data. We find that the ability of a defaulted institution to start a cascade depends on an interplay of shock size and connectivity. Further results indicate that the ability to limit default risk by spreading the lending to many counterparts decreased with the financial crisis. To evaluate the influence of the network structure on market stability, we compare the simulated cascades from the empirical network with results from different randomized network models. The results show that the empirical network has non-random features, which cannot be captured by rewired networks. The analysis also reveals that simulations assuming homogeneity for the size of banks and loan contracts dramatically overestimates the fragility of the interbank market

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Bibliographic Info

Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1872.

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Length: 13 pages
Date of creation: Sep 2013
Date of revision:
Handle: RePEc:kie:kieliw:1872

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Keywords: interbank loan Networks; systemic risk; cascades; null models;

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  1. Hartmann, Philipp & Manna, Michele & Manzanares, Andres, 2001. "The microstructure of the euro money market," Journal of International Money and Finance, Elsevier, Elsevier, vol. 20(6), pages 895-948, November.
  2. Giorgio Fagiolo & Tiziano Squartini & Diego Garlaschelli, 2011. "Null Models of Economic Networks: The Case of the World Trade Web," Papers 1112.2895, arXiv.org, revised Sep 2012.
  3. Ben Craig & Goetz von Peter, 2010. "Interbank tiering and money center banks," BIS Working Papers 322, Bank for International Settlements.
  4. Thomas Lux, Daniel Fricke, 2012. "Core-Periphery Structure in the Overnight Money Market: Evidence from the e-MID Trading Platform," Kiel Working Papers 1759, Kiel Institute for the World Economy.
  5. Nier, Erlend & Yang, Jing & Yorulmazer, Tanju & Alentorn, Amadeo, 2007. "Network models and financial stability," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 31(6), pages 2033-2060, June.
  6. Kimmo Soramaki & Morten L. Bech & Jeffrey Arnold & Robert J. Glass & Walter Beyeler, 2006. "The topology of interbank payment flows," Staff Reports, Federal Reserve Bank of New York 243, Federal Reserve Bank of New York.
  7. Renaud Beaupain & Alain Durré, 2011. "Inferring trading dynamics for an OTC market: the case of the euro area overnight money market," Quantitative Finance, Taylor & Francis Journals, Taylor & Francis Journals, vol. 11(9), pages 1285-1295, October.
  8. Raddant, Matthias, 2014. "Structure in the Italian overnight loan market," Journal of International Money and Finance, Elsevier, Elsevier, vol. 41(C), pages 197-213.
  9. 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, Elsevier, vol. 32(1), pages 259-278, January.
  10. Luca Arciero & Ronald Heijmans & Richard Heuver & Marco Massarenti & Cristina Picillo & Francesco Vacirca, 2013. "How to measure the unsecured money market? The Eurosystem's implementation and validation using TARGET2 data," DNB Working Papers, Netherlands Central Bank, Research Department 369, Netherlands Central Bank, Research Department.
  11. Cocco, João F. & Gomes, Francisco J. & Martins, Nuno C., 2009. "Lending relationships in the interbank market," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 18(1), pages 24-48, January.
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