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Testing information diffusion in the decentralized unsecured market for euro funds

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  • Edoardo Rainone

    () (Bank of Italy)

Abstract

Average rates in the decentralized unsecured market for euro funds, like the EONIA for the overnight maturity, are fundamental indicators of the smooth transmission of the signal rate by the central bank. Public information plays an important role in this context, as key interest rates are set by the central bank and average market rates are published daily, constituting common knowledge. Nevertheless, according to the theoretical literature on over-the-counter markets, private information may have an important role in a decentralized market. The diffusion of private information can generate prices that depend on the decentralized market structure. This is the first paper to use an ad hoc (network) version of the spatial autoregressive model to assess the presence of this mechanism. I propose a simple methodology to test whether the joint distribution of rates depends on the interbank network structure and to estimate information diffusion strength. The method is applied to a unique dataset collecting unsecured interbank loans and characteristics of banks operating in European central bank money. A wide time span including sovereign debt crises in the euro area is considered. I find that information diffusion played a greater role during periods dominated by strong uncertainty.

Suggested Citation

  • Edoardo Rainone, 2015. "Testing information diffusion in the decentralized unsecured market for euro funds," Temi di discussione (Economic working papers) 1022, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:wptemi:td_1022_15
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    Cited by:

    1. 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.

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    More about this item

    Keywords

    interbank markets; money; trading networks; payment systems; information aggregation; spatial autoregressive models; bilateral trading;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General

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