Quantifying Preferential Trading in the e-MID Interbank Market

25 Pages Posted: 25 Oct 2013 Last revised: 5 Nov 2013

See all articles by Vasilis Hatzopoulos

Vasilis Hatzopoulos

City University London - Department of Economics

Giulia Iori

City University London - Department of Economics

Rosario N. Mantegna

University of Palermo

Salvatore Miccichè

University of Palermo - Department of Physics and Chemistry

Michele Tumminello

University of Palermo; Carnegie Mellon University - Department of Social and Decision Sciences

Date Written: October 28, 2013

Abstract

Interbank markets allow credit institutions to exchange capital for purposes of liquidity management. These markets are among the most liquid markets in the financial system. However, liquidity of interbank markets dropped during the 2007-2008 financial crisis, and such a lack of liquidity influenced the entire economic system. In this paper, we analyze transaction data from the e-MID market which is the only electronic interbank market in the Euro Area and US, over a period of eleven years (1999-2009). We adapt a method developed to detect statistically validated links in a network, in order to reveal preferential trading in a directed network. Preferential trading between banks is detected by comparing empirically observed trading relationships with a null hypothesis that assumes random trading among banks doing a heterogeneous number of transactions. Preferential trading patterns are revealed at time windows of 3-maintenance periods. We show that preferential trading is observed throughout the whole period of analysis and that the number of preferential trading links does not show any significant trend in time, in spite of a decreasing trend in the number of pairs of banks making transactions. We observe that preferential trading connections typically involve large trading volumes. During the crisis, we also observe that transactions occurring between banks with a preferential connection occur at larger interest rates than the complement set — an effect that is not observed before the crisis.

Keywords: Interbank markets, interbank rates, preferential links, statistically validated networks

JEL Classification: G15, G21

Suggested Citation

Hatzopoulos, Vasilis and Iori, Giulia and Mantegna, Rosario Nunzio and Miccichè, Salvatore and Tumminello, Michele, Quantifying Preferential Trading in the e-MID Interbank Market (October 28, 2013). Available at SSRN: https://ssrn.com/abstract=2343647 or http://dx.doi.org/10.2139/ssrn.2343647

Vasilis Hatzopoulos

City University London - Department of Economics ( email )

Northampton Square
London, EC1V 0HB
United Kingdom

Giulia Iori

City University London - Department of Economics ( email )

Northampton Square
London, EC1V 0HB
United Kingdom

Rosario Nunzio Mantegna

University of Palermo ( email )

Dipartimento di Fisica e Chimica
Viale delle Scienze, Edificio 18
Palermo, PA I-90128
Italy
+3909123899074 (Phone)
+3909123860815 (Fax)

HOME PAGE: http://www.unipa.it/persone/docenti/m/rosario.mantegna

Salvatore Miccichè (Contact Author)

University of Palermo - Department of Physics and Chemistry ( email )

Viale delle Scienze, Ed. 17
Palermo, PA 90128
Italy
+3909123899145 (Phone)

HOME PAGE: http://www.unipa.it/~salvatore.micciche

Michele Tumminello

University of Palermo ( email )

Viale delle Scienza
Palermo, Palermo 90128
Italy

Carnegie Mellon University - Department of Social and Decision Sciences ( email )

Pittsburgh, PA 15213-3890
United States

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