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A dynamic network model of the unsecured interbank lending market

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  • Blasques, Francisco
  • Bräuning, Falk
  • Lelyveld, Iman van

Abstract

We introduce a dynamic network model of interbank lending and estimate the parameters by indirect inference using network statistics of the Dutch interbank market from February 2008 to April 2011. We find that credit-risk uncertainty and peer monitoring are significant factors in explaining the sparse core-periphery structure of the market and the presence of relationship lending. Shocks to credit-risk uncertainty lead to extended periods of low market activity, intensified by reduced peer monitoring. Moreover, changes in the central bank’s interest rate corridor have both a direct effect on the market as well as an indirect effect by changing banks’ monitoring efforts.

Suggested Citation

  • Blasques, Francisco & Bräuning, Falk & Lelyveld, Iman van, 2018. "A dynamic network model of the unsecured interbank lending market," Journal of Economic Dynamics and Control, Elsevier, vol. 90(C), pages 310-342.
  • Handle: RePEc:eee:dyncon:v:90:y:2018:i:c:p:310-342
    DOI: 10.1016/j.jedc.2018.03.015
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    Cited by:

    1. Abbassi, Puriya & Bräuning, Falk & Schulze, Niels, 2017. "Bargaining power and outside options in the interbank lending market," Discussion Papers 31/2017, Deutsche Bundesbank.
    2. S. Gabrieli & C.-P. Georg, 2014. "A network view on interbank market freezes," Working papers 531, Banque de France.
    3. Simpson Zhang & Mihaela van der Schaar, 2018. "Reputational Dynamics in Financial Networks During a Crisis," Working Papers 18-03, Office of Financial Research, US Department of the Treasury.
    4. Fernando Linardi & Cees (C.G.H.) Diks & Marco (M.J.) van der Leij & Iuri Lazier, 2017. "Dynamic Interbank Network Analysis Using Latent Space Models," Tinbergen Institute Discussion Papers 17-101/II, Tinbergen Institute.
    5. Anand, Kartik & van Lelyveld, Iman & Banai, Ádám & Friedrich, Soeren & Garratt, Rodney & Hałaj, Grzegorz & Fique, Jose & Hansen, Ib & Jaramillo, Serafín Martínez & Lee, Hwayun & Molina-Borboa, José Lu, 2018. "The missing links: A global study on uncovering financial network structures from partial data," Journal of Financial Stability, Elsevier, vol. 35(C), pages 107-119.
    6. Chiu, Jonathan & Monnet, Cyril, 2016. "Relationships in the interbank market," Working Paper Series 5210, Victoria University of Wellington, School of Economics and Finance.
    7. Gofman, Michael, 2017. "Efficiency and stability of a financial architecture with too-interconnected-to-fail institutions," Journal of Financial Economics, Elsevier, vol. 124(1), pages 113-146.
    8. repec:eee:phsmap:v:493:y:2018:i:c:p:203-209 is not listed on IDEAS
    9. Paul Glasserman & H. Peyton Young, 2016. "Contagion in Financial Networks," Journal of Economic Literature, American Economic Association, vol. 54(3), pages 779-831, September.
    10. repec:eee:finsta:v:36:y:2018:i:c:p:246-262 is not listed on IDEAS
    11. repec:oup:revfin:v:21:y:2017:i:1:p:33-75. is not listed on IDEAS
    12. Falk Bräuning & Falko Fecht, 2017. "Relationship Lending in the Interbank Market and the Price of Liquidity," Review of Finance, European Finance Association, vol. 21(1), pages 33-75.
    13. Q. Farooq Akram & Casper Christophersen, 2017. "Pricing in the Norwegian Interbank Market – the Effects of Liquidity and Implicit Government Support," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 79(2), pages 165-204, April.
    14. repec:eee:jmvana:v:169:y:2019:i:c:p:1-20 is not listed on IDEAS
    15. Aldasoro, Iñaki & Faia, Ester, 2016. "Systemic loops and liquidity regulation," Journal of Financial Stability, Elsevier, vol. 27(C), pages 1-16.
    16. Paul Glasserman, 2015. "Contagion in Financial Networks," Economics Series Working Papers 764, University of Oxford, Department of Economics.
    17. Edoardo Rainone, 2017. "Pairwise trading in the money market during the European sovereign debt crisis," Temi di discussione (Economic working papers) 1160, Bank of Italy, Economic Research and International Relations Area.
    18. Glasserman, Paul & Young, H. Peyton, 2016. "Contagion in financial networks," LSE Research Online Documents on Economics 68681, London School of Economics and Political Science, LSE Library.
    19. Matteo Chinazzi & Stefano Pegoraro & Giorgio Fagiolo, 2015. "Defuse the Bomb: Rewiring Interbank Networks," LEM Papers Series 2015/16, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    20. Paul Glasserman & H. Peyton Young, 2015. "Contagion in Financial Markets," Working Papers 15-21, Office of Financial Research, US Department of the Treasury.
    21. Francesco Palazzo, 2016. "Peer monitoring via loss mutualization," Temi di discussione (Economic working papers) 1088, Bank of Italy, Economic Research and International Relations Area.
    22. Rünstler, Gerhard, 2016. "Network Dependence in the Euro Area Money Market," Working Paper Series 1887, European Central Bank.
    23. Lux, Thomas, 2015. "Emergence of a core-periphery structure in a simple dynamic model of the interbank market," Journal of Economic Dynamics and Control, Elsevier, vol. 52(C), pages 11-23.

    More about this item

    Keywords

    Interbank liquidity; Financial networks; Credit-risk uncertainty; Monitoring; Trading relationships; Indirect inference estimation;

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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