A Model of Network Formation for the Overnight Interbank Market

35 Pages Posted: 17 Apr 2016 Last revised: 28 Apr 2016

See all articles by Mikhail Anufriev

Mikhail Anufriev

University of Technology Sydney (UTS)

Andrea Deghi

Department of Political Economy and Statistics, Universita di Siena

Valentyn Panchenko

UNSW Business School, Economics, University of New South Wales

Paolo Pin

Bocconi University - Department of Decision Sciences

Date Written: April 12, 2016

Abstract

We introduce an endogenous network model of the interbank overnight lending market. Banks are motivated to meet the minimum reserve requirements set by the Central Bank, but their reserves are subject to random shocks. To adjust their expected end-of-the-day reserves, banks enter the interbank market, where borrowers decrease their expected cost of borrowing with the Central Bank, and lenders decrease their deposits with the Central bank in an attempt to gain a higher interest rate from the interbank market, but face a counter-party default risk. In this setting, we show that a financial network arises endogenously, exhibiting a unique giant component which is at the same time connected but bipartite in lenders and borrowers. The model reproduces features of trading decisions observed empirically in the Italian e-MID market for overnight interbank deposits.

Keywords: Interbank, Endogenous, Network

Suggested Citation

Anufriev, Mikhail and Deghi, Andrea and Panchenko, Valentyn and Pin, Paolo, A Model of Network Formation for the Overnight Interbank Market (April 12, 2016). CIFR Paper No. 103/2016. Available at SSRN: https://ssrn.com/abstract=2763964 or http://dx.doi.org/10.2139/ssrn.2763964

Mikhail Anufriev

University of Technology Sydney (UTS) ( email )

P. O. Box 123
Broadway, NSW 2007
Australia

Andrea Deghi

Department of Political Economy and Statistics, Universita di Siena ( email )

Via Banchi di Sotto, 55
Siena, 53100
Italy

Valentyn Panchenko (Contact Author)

UNSW Business School, Economics, University of New South Wales ( email )

Sydney, NSW 2052
Australia

HOME PAGE: http://research.economics.unsw.edu.au/vpanchenko

Paolo Pin

Bocconi University - Department of Decision Sciences ( email )

Via Roentgen 1
Milan, 20136
Italy

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