Liquidity Networks, Interconnectedness, and Interbank Information Asymmetry

42 Pages Posted: 14 Jun 2021 Last revised: 30 Jun 2021

See all articles by Celso Brunetti

Celso Brunetti

Board of Governors of the Federal Reserve System

Jeffrey H. Harris

American University - Department of Finance and Real Estate

Shawn Mankad

North Carolina State University - Department of Business Management

Multiple version iconThere are 2 versions of this paper

Date Written: March, 2021

Abstract

Network analysis has demonstrated that interconnectedness among market participants results in spillovers, amplifies or absorbs shocks, and creates other nonlinear effects that ultimately affect market health. In this paper, we propose a new directed network construct, the liquidity network, to capture the urgency to trade by connecting the initiating party in a trade to the passive party. Alongside the conventional trading network connecting sellers to buyers, we show both network types complement each other: Liquidity networks reveal valuable information, particularly when information asymmetry in the market is high, and provide a more comprehensive characterization of interconnectivity in the overnight-lending market.

JEL Classification: G10, G20, C10

Suggested Citation

Brunetti, Celso and Harris, Jeffrey H. and Mankad, Shawn, Liquidity Networks, Interconnectedness, and Interbank Information Asymmetry (March, 2021). FEDS Working Paper No. 2021-17, Available at SSRN: https://ssrn.com/abstract=3865413 or http://dx.doi.org/10.17016/FEDS.2021.017

Celso Brunetti (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Jeffrey H. Harris

American University - Department of Finance and Real Estate ( email )

Kogod School of Business
4400 Massachusetts Ave., N.W.
Washington, DC 20016-8044
United States
202-885-6669 (Phone)

Shawn Mankad

North Carolina State University - Department of Business Management ( email )

Raleigh, NC 27695
United States

HOME PAGE: http://mankad-research.github.io/

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