Interconnectedness in the Interbank Market
49 Pages Posted: 17 Oct 2015
Date Written: October 15, 2015
We study the behavior of the interbank market before, during and after the 2008 financial crisis. Leveraging recent advances in network analysis, we study two network structures, a correlation network based on publicly traded bank returns, and a physical network based on interbank lending transactions. While the two networks behave similarly pre-crisis, during the crisis the correlation network shows an increase in interconnectedness while the physical network highlights a marked decrease in interconnectedness. Moreover, these networks respond differently to monetary and macroeconomic shocks. Physical networks forecast liquidity problems while correlation networks forecast financial crises.
Keywords: Interconnectedness, correlation network, financial crisis, interbank market, physical network
JEL Classification: G2, G1, C1
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