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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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  • Liberati, Caterina
  • Marzo, Massimiliano
  • Zagaglia, Paolo
  • Zappa, Paola

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 University Library of Munich, Germany in its series MPRA Paper with number 40223.

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Date of creation: 16 Jul 2012
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Handle: RePEc:pra:mprapa:40223

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Keywords: market microstructure; network analysis; money markets; asset pricing;

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  1. 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.
  2. Zagaglia, Paolo, 2010. "Informed trading in the Euro money market for term lending," MPRA Paper 20415, University Library of Munich, Germany.
  3. Florian Heider & Marie Hoerova & Cornelia Holthausen, 2009. "Liquidity Hoarding and Interbank Market Spreads: The Role of Counterparty Risk," Working Paper Series 1126, European Central Bank.
  4. Morten L. Bech & Enghin Atalay, 2008. "The topology of the federal funds market," Working Paper Series 986, European Central Bank.
  5. Kimmo Soramaki & Morten L. Bech & Jeffrey Arnold & Robert J. Glass & Walter Beyeler, 2006. "The topology of interbank payment flows," Staff Reports 243, Federal Reserve Bank of New York.
  6. G. De Masi & G. Iori & G. Caldarelli, 2006. "A fitness model for the Italian Interbank Money Market," Papers physics/0610108, arXiv.org.
  7. Ozsoylev, Han N. & Walden, Johan, 2011. "Asset pricing in large information networks," Journal of Economic Theory, Elsevier, vol. 146(6), pages 2252-2280.
  8. Iori, G. & Masi, G. D. & Precup, O. V. & Gabbi, G. & Caldarelli, G., 2005. "A network analysis of the Italian oversight money market," Working Papers 05/05, Department of Economics, City University London.
  9. Ana Babus, 2006. "The Formation of Financial Networks," Tinbergen Institute Discussion Papers 06-093/2, Tinbergen Institute.
  10. Julien Idier & Stefano Nardelli, 2008. "Probability of informed trading on the euro overnight market rate - an update," Working Paper Series 987, European Central Bank.
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