City Research Online

Abstract

Interbank markets allow credit institutions to exchange capital for purposes of liquidity management. These markets are among the most liquid markets in the financial system. However, liquidity of interbank markets dropped during the 2007-2008 financial crisis, and such a lack of liquidity influenced the entire economic system. In this paper, we analyze transaction data from the e-MID market which is the only electronic interbank market in the Euro Area and US, over a period of eleven years (1999-2009). We adapt a method developed to detect statistically validated links in a network, in order to reveal preferential trading in a directed network. Preferential trading between banks is detected by comparing empirically observed trading relationships with a null hypothesis that assumes random trading among banks doing a heterogeneous number of transactions. Preferential trading patterns are revealed at time windows of 3-maintenance periods. We show that preferential trading is observed throughout the whole period of analysis and that the number of preferential trading links does not show any significant trend in time, in spite of a decreasing trend in the number of pairs of banks making transactions. We observe that preferential trading connections typically involve large trading volumes. During the crisis, we also observe that transactions occurring between banks with a preferential connection occur at larger interest rates than the complement set - an effect that is not observed before the crisis.

Publication Type:	Article
Additional Information:	This is an Accepted Manuscript of an article published in Quantitative Finance and can be found at http://www.tandfonline.com/doi/abs/10.1080/14697688.2014.969889. Full citation: Hatzopoulos, V., Iori, G., Mantegna, R., Micciche, S. & Tumminello, M. (2015). Quantifying preferential trading in the e-MID interbank market. Quantitative Finance, 15(4), pp. 693-710. doi: 10.1080/14697688.2014.969889
Publisher Keywords:	Interbank markets, interbank rates, preferential links, statistically validated networks
Subjects:	H Social Sciences > HJ Public Finance
Departments:	School of Policy & Global Affairs > Economics
SWORD Depositor:	Symplectic Administrator

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