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The microstructure of the money market before and after the financial crisis: a network perspective

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    Abstract

    This paper provides an in depth microstructure analysis of the euro money market by taking a network perspective. Banks are the nodes of the networks; unsecured overnight loans form the links connecting the nodes. Daily interbank networks verify the same stylised facts documented for many real complex systems: they are highly sparse, far from being complete, exhibit the small world property and a power-law distribution of degree (the number of counterparties each bank establishes credit relationships with). On the other hand, the tendency of banks to cluster, i.e. to form groups where ties are relatively denser, is much lower than in other real networks. The time patterns of some network statistics provide interesting insights into the evolution of the potential for financial contagion; the partition of the network into smaller connected subnetworks documents a move against market integration; heterogeneous developments across banks of different size offer insights into banks’ behaviour. An analysis of banks’ prominence in the market is undertaken using centrality measures: the various indicators suggest that the biggest banks are also the most connected before the onset of the crisis; however, medium/small and very small banks’ centralities increase progressively after August 2007 as these banks increase their “influence” as liquidity providers. The rich set of measures described in this paper represents a key input for future research.

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    Bibliographic Info

    Paper provided by Tor Vergata University, CEIS in its series CEIS Research Paper with number 181.

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    Length: 45 pages
    Date of creation: 19 Jan 2011
    Date of revision: 19 Jan 2011
    Handle: RePEc:rtv:ceisrp:181

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    Postal: CEIS - Centre for Economic and International Studies - Faculty of Economics - University of Rome "Tor Vergata" - Via Columbia, 2 00133 Roma
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    Web: http://www.ceistorvergata.it

    Related research

    Keywords: Network analysis; Network centrality indicators; Money market; Financial crisis;

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    1. 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.
    2. Ethan Cohen-Cole & Andrei Kirilenko & Eleonora Patacchini, 2010. "Are Networks Priced? Network Topology and Order Trading Strategies in High Liquidity Markets," EIEF Working Papers Series 1011, Einaudi Institute for Economics and Finance (EIEF), revised Apr 2010.
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    Cited by:
    1. Peltonen, Tuomas A. & Scheicher, Martin & Vuillemey, Guillaume, 2013. "The network structure of the CDS market and its determinants," Working Paper Series 1583, European Central Bank.
    2. Marco Pelliccia, 2012. "Risk-sharing and probabilistic network structure," Birkbeck Working Papers in Economics and Finance 1214, Birkbeck, Department of Economics, Mathematics & Statistics.

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