Liquidity Networks, Interconnectedness, and Interbank Information Asymmetry
42 Pages Posted: 14 Jun 2021 Last revised: 30 Jun 2021
Date Written: March, 2021
Network analysis has demonstrated that interconnectedness among market participants results in spillovers, amplifies or absorbs shocks, and creates other nonlinear effects that ultimately affect 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 complement each other: Liquidity networks reveal valuable information, particularly when information asymmetry in the market is high, and provide a more comprehensive characterization of interconnectivity in the overnight-lending market.
JEL Classification: G10, G20, C10
Suggested Citation: Suggested Citation