20 Pages Posted: 11 May 2020
Date Written: April 15, 2020
Network analysis has become a key framework in financial economics in understanding how interconnectedness among market participants results in spillovers, amplifies or absorbs shocks, and creates other nonlinear effects that ultimately impact 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 capture different information and complement each other, leading to a more comprehensive characterization of interconnectivity in the overnight-lending market and improved forecasts of macroeconomic variables.
Keywords: banking networks, interconnectedness, liquidity
JEL Classification: G21, C10, G10
Suggested Citation: Suggested Citation