Liquidity Networks

20 Pages Posted: 11 May 2020

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

Cornell University

Date Written: April 15, 2020

Abstract

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

Brunetti, Celso and Harris, Jeffrey H. and Mankad, Shawn, Liquidity Networks (April 15, 2020). Available at SSRN: https://ssrn.com/abstract=3576512 or http://dx.doi.org/10.2139/ssrn.3576512

Celso Brunetti

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 (Contact Author)

Cornell University ( email )

Ithaca, NY 14853
United States
6072559594 (Phone)

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