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Pairwise trading in the money market during the European sovereign debt crisis

Author

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  • Edoardo Rainone

    () (Bank of Italy)

Abstract

This paper studies over-the-counter (OTC) trading in the unsecured interbank market for euro funds. The goal of our analysis is to identify the determinants of the probability of trading, the bilateral rate and the quantity exchanged during the European sovereign debt crisis. We show how the specific features of this market bring to a non-standard estimation framework. A dyadic econometric model with shadow rates is proposed to control for possibly endogenous matching with the counterparty. A unique dataset containing banks characteristics and bilateral trades is built and used to study the evolution of trading patterns. The estimates bring mild evidence towards the existence of shadow rates. Active monitoring decreased market access to low equity and illiquid borrowers, while dispersion in rates and quantities is mainly driven by banks' nationality, especially during the peak of the crisis.

Suggested Citation

  • 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.
  • Handle: RePEc:bdi:wptemi:td_1160_17
    as

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    File URL: http://www.bancaditalia.it/pubblicazioni/temi-discussione/2017/2017-1160/en_tema_1160.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    interbank networks; payment systems; sample selection models; two-step estimation; over-the-counter market; money; dyadic model; financial crisis;

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • G01 - Financial Economics - - General - - - Financial Crises
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General

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