Structure in the Italian overnight loan market

Raddant, Matthias

doi:10.1016/j.jimonfin.2013.11.005

Cited by 11 publications

(13 citation statements)

References 24 publications

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“…In this paper we apply the DebtRank [12] to model the cascade risk, and we use real European e-MID overnight money market data to calibrate the networks among agents [28][29][30][31]. Pigouvian taxation is then used to finance the rescue fund, which is used in the case of default of single financial players.…”

Section: Introductionmentioning

confidence: 99%

Reduction of Systemic Risk by Means of Pigouvian Taxation

Zlatić

Gabbi

Abraham³

2015

PLoS ONE

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We analyze the possibility of reduction of systemic risk in financial markets through Pigouvian taxation of financial institutions, which is used to support the rescue fund. We introduce the concept of the cascade risk with a clear operational definition as a subclass and a network related measure of the systemic risk. Using financial networks constructed from real Italian money market data and using realistic parameters, we show that the cascade risk can be substantially reduced by a small rate of taxation and by means of a simple strategy of the money transfer from the rescue fund to interbanking market subjects. Furthermore, we show that while negative effects on the return on investment (ROI) are direct and certain, an overall positive effect on risk adjusted return on investments (ROI RA) is visible. Please note that the taxation is introduced as a monetary/regulatory, not as a _scal measure, as the term could suggest. The rescue fund is implemented in a form of a common reserve fund.

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Section: Introductionmentioning

confidence: 99%

Reduction of Systemic Risk by Means of Pigouvian Taxation

Zlatić

Gabbi

Abraham³

2015

PLoS ONE

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“…Banking system can be viewed as a complex network [1][2][3] where nodes are banks and the links between nodes are the credit linkages between them. These links are highly volatile but can be aggregated and form emergent network structures.…”

Section: Introductionmentioning

confidence: 99%

Risk analysis and controllability of credit market

Razakanirina

Chopard

2015

ESAIM: Proc.

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Abstract. In this paper we present the behaviours of a simple credit market model built upon a static directed complex network topology. We found that the market structure plays a key role on the stability of such a model. Cyclic topologies accumulate more debt than acyclic ones, and when the total cash is less than the total debt, the market becomes unstable and exhibits chaotic behaviour. Exogenous creation of currency is used to control the market stability. Two regimes of control emerge depending on the credit market structure. First, power law control is needed for acyclic random topologies built upon Erdos-Rényi and Barabasi-Albert algorithms. Second, exponential control is needed to stabilize cyclic market built with the Watts-Strogatz algorithm.Résumé. Dans cet article, nous présentons les comportements d'un modèle simplifié du marché du crédit. La structure du marché est construite autour d'un réseau complexe statique. Nos résultats montrent que la structure du marché joue un rôle crucial dans la stabilité du modèle. Les topologies cycliques accumulent plus de dettes que les topologies acycliques et lorsque la dette accumulée excède le montant total des liquidités, le marché devient instable et converge vers un comportement chaotique. La création exogène de liquidité est utilisée pour contrôler la stabilité du marché. Deux types de contrôle qui dépendent de la structure du marché du créditémergent. Le premier type de contrôle est le contrôle suivant une loi de puissance. Ce contrôle est nécessaire pour stabiliser un marché basé sur les topologies acycliques du type réseaux de Erdos-Rényi et Barabasi-Albert. Le second type de contrôle est le contrôle suivant une loi exponentielle qui est nécessaire pour stabiliser un marché basé sur les topologies cycliques du type réseaux de Watts-Strogatz.

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“…Raddant (2014) investigates volume and interest dynamics on the Italian interbank market. The author finds that before the Lehman default large net-borrowers obtained funds at a discount while post-Lehman borrowers with large net-exposures paid a premium.…”

Section: Introductionmentioning

confidence: 99%

Interbank Funding as Insurance Mechanism for (Persistent) Liquidity Shocks

Bluhm¹

2015

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in Non-Technical SummaryThe financial system serves to allocate funds from savers to investors. In this framework banks assume a crucial function via the provision of credit and liquidity to the real economy. To efficiently fulfill this function, the interbank market allows for the allocation of funds among banks. In particular, banks use the interbank market to hedge idiosyncratic liquidity shocks, that is, in-or outflow of funds. The recent financial crisis however has demonstrated that the interbank market can be prone to freezes and become a source of systemic risk and adverse spill-over effects to the banking system and the wider economy.This paper extends the literature on interbank markets via taking into account persistence of liquidity shocks. In particular, a theory of short and long term interbank funding is developed and embedded in a micro-founded agent based network model. The model combines analytical rigour with a flexible simulation framework in which effects driven by individually motivated heterogeneous agents on financial system and real economy can be assessed. Besides numerous innovations it features interbank funding as an over-the-counter phenomenon and realistically replicates financial system phenomena of network formation, monetary policy transmission and endogenous money creation. After investigating the model's network properties, it is used for analyses to shed light on the purpose of the interbank market and its role for allocation and stability in the financial system. Analyses in the modeling framework provide evidence that the interbank market renders the financial system more efficient relative to a setting without mutual insurance against persistent liquidity shocks. However, given that banks in the model can maximize profit via emitting credit and creating money while only facing limited liability, an unleashed financial system without a policymaker's regulation can well lead to economic outcomes below those resulting from a financial system with less efficient allocation. In a realistically calibrated simulation exercise featuring a policymaker who puts a lid on credit and money creation with a view on real economic activity while keeping financial fragility in check allows for significant output gains. Therefore the model provides evidence that interbank funding indeed plays a crucial role for welfare.Furthermore, and related to those findings, the framework is used to carry out an optimal po...

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Structure in the Italian overnight loan market

Cited by 11 publications

References 24 publications

Reduction of Systemic Risk by Means of Pigouvian Taxation

Reduction of Systemic Risk by Means of Pigouvian Taxation

Risk analysis and controllability of credit market

Interbank Funding as Insurance Mechanism for (Persistent) Liquidity Shocks

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