Short-Term Liquidity Contagion in the Interbank Market

CentER Discussion Paper Series No. 2016-018

33 Pages Posted: 21 Apr 2016

See all articles by Carlos León

Carlos León

Tilburg University - Center for Economic Research (CentER); Financial Network Analytics Ltd

Constanza Martinez Ventura

Banco de la Republica

Freddy Cepeda

Central Bank of Colombia

Date Written: April 20, 2016

Abstract

We implement a modified version of DebtRank, a measure of systemic impact inspired in feedback centrality, to recursively measure the contagion effects caused by the default of a selected financial institution. In our case contagion is a liquidity issue, measured as the decrease in financial institutions’ short-term liquidity position across the Colombian interbank network. Concurrent with related literature, unless contagion dynamics are preceded by a major - but unlikely - drop in the short-term liquidity position of all participants, we consistently find that individual and systemic contagion effects are negligible. We find that negative effects resulting from contagion are concentrated in a few financial institutions. However, as most of their impact is conditional on the occurrence of unlikely major widespread illiquidity events, and due to the subsidiary contribution of the interbank market to the local money market, their overall systemic importance is still to be confirmed.

Keywords: financial networks, contagion, default, liquidity, DebtRank

JEL Classification: G21, L14, C63

Suggested Citation

León, Carlos and Martinez Ventura, Constanza and Cepeda, Freddy, Short-Term Liquidity Contagion in the Interbank Market (April 20, 2016). CentER Discussion Paper Series No. 2016-018, Available at SSRN: https://ssrn.com/abstract=2767338 or http://dx.doi.org/10.2139/ssrn.2767338

Carlos León (Contact Author)

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Financial Network Analytics Ltd ( email )

London
United Kingdom

Constanza Martinez Ventura

Banco de la Republica ( email )

Carrera 7 #14-78
Bogota
Colombia
(571)3431111 (Phone)

Freddy Cepeda

Central Bank of Colombia ( email )

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
55
Abstract Views
708
Rank
735,858
PlumX Metrics