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on Central Banking |
| By: | James R. Barth; Gerard Caprio, Jr.; Ross Levine |
| Abstract: | In this paper and the associated online database, we provide new data and measures of bank regulatory and supervisory policies in 180 countries from 1999 to 2011. The data include and the measures are based upon responses to hundreds of questions, including information on permissible bank activities, capital requirements, the powers of official supervisory agencies, information disclosure requirements, external governance mechanisms, deposit insurance, barriers to entry, and loan provisioning. The dataset also provides information on the organization of regulatory agencies and the size, structure, and performance of banking systems. Since the underlying surveys are large and complex, we construct summary indices of key bank regulatory and supervisory policies to facilitate cross-country comparisons and analyses of changes in banking policies over time. |
| JEL: | G21 G28 O5 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18733&r=cba |
| By: | Alford, Duncan (Asian Development Bank Institute) |
| Abstract: | This paper focuses on the relevance to emerging economies of three major financial reforms following the global financial crisis of 2007–2009: (1) the improved capital requirements intended to reduce the risk of bank failure (“Basel III”), (2) the improved recovery and resolution regimes for global banks, and (3) the development of supervisory colleges of cross-border financial institutions to improve supervisory cooperation and convergence. The paper also addresses the implications of these regulatory reforms for Asian emerging markets. |
| Keywords: | international financial reforms; capital standards; resolution regimes; supervisory colleges; emerging markets |
| JEL: | G20 G28 O16 |
| Date: | 2013–01–17 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0402&r=cba |
| By: | John B. Taylor (Stanford University) |
| Abstract: | This paper assesses the relative effectiveness of central bank independence versus policy rules for the policy instruments in bringing about good economic performance. It examines historical changes in (1) macroeconomic performance, (2) the adherence to rules-based monetary policy, and (3) the degree of central bank independence. Macroeconomic performance is defined in terms of both price stability and output stability. Factors other than monetary policy rules are examined. Both de jure and de facto central bank independence at the Fed are considered. The main finding is that changes in macroeconomic performance during the past half century were closely associated with changes the adherence to rules-based monetary policy and in the degree of de facto monetary independence at the Fed. But changes in economic performance were not associated with changes in de jure central bank independence. Formal central bank independence alone has not generated good monetary policy outcomes. A rules-based framework is essential. |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:sip:dpaper:12-009&r=cba |
| By: | V. DE BRUYCKERE; M. GERHARDT; G. SCHEPENS; R. VANDER VENNET |
| Abstract: | This paper investigates contagion between bank risk and sovereign risk in Europe over the period 2006-2011. We define contagion as excess correlation, i.e. correlation between banks and sovereigns over and above what is explained by common factors, using CDS spreads at the bank and at the sovereign level. Moreover, we investigate the determinants of contagion by analyzing bank-specific as well as country-specific variables and their interaction. We provide empirical evidence that various contagion channels are at work, including a strong home bias in bank bond portfolios, using the EBA’s disclosure of sovereign exposures of banks. We find that banks with a weak capital and/or funding position are particularly vulnerable to risk spillovers. At the country level, the debt ratio is the most important driver of contagion. |
| Keywords: | Contagion, bank risk, sovereign risk, bank business models, bank regulation, sovereign debt crisis |
| JEL: | G01 G21 G28 H6 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:rug:rugwps:12/828&r=cba |
| By: | Alexander Zimper (Department of Economics, University of Pretoria) |
| Abstract: | The Basel Committee on Banking Supervision sets the official confidence level at which a bank is supposed to absorb annual losses at 99.9%. However, due to an inconsistency between the notion of expected losses in the Vasicek model, on the one hand, and the practice of Basel regulation, on the other hand, actual confidence levels are likely to be lower. This paper calculates the minimal confidence levels which correspond to a worst case scenario in which a Basel-regulated bank holds capital against unexpected losses only. I argue that the probability of a bank failure is significantly higher than the official 0.1% if, firstly, the bank holds risky loans and if, secondly, the bank was previously affeected by substantial write-offs. |
| Keywords: | Banking Regulation, Probability of Bank Failure, Definition of Expected Losses, Financial Stability |
| JEL: | G18 G32 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201305&r=cba |
| By: | Pelin Ilbas (National Bank of Belgium, Research Department); Øistein Røisland (Norges Bank); Tommy Sveen (BI Norwegian Business School) |
| Abstract: | We analyze the influence of the Taylor rule on US monetary policy by estimating the policy preferences of the Fed within a DSGE framework. The policy preferences are represented by a standard loss function, extended with a term that represents the degree of reluctance to letting the interest rate deviate from the Taylor rule. The empirical support for the presence of a Taylor rule term in the policy preferences is strong and robust to alternative specifications of the loss function. Analyzing the Fed's monetary policy in the period 2001-2006, we find no support for a decreased weight on the Taylor rule, contrary to what has been argued in the literature. The large deviations from the Taylor rule in this period are due to large, negative demand-side shocks, and represent optimal deviations for a given weight on the Taylor rule. |
| Keywords: | optimal monetary policy, simple rules, central bank preferences |
| JEL: | E42 E52 E58 E61 E65 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:201301-241&r=cba |
| By: | John B. Taylor (Stanford University) |
| Abstract: | Research in the early 1980s found that the gains from international coordination of monetary policy were quantitatively small compared to simply getting domestic policy right. That prediction turned out to be a pretty good description of monetary policy in the 1980s, 1990s, and until recently. Because this balanced international picture has largely disappeared, the 1980s view about monetary policy coordination needs to be reexamined. The source of the problem is not that the models or the theory are wrong. Rather there was a deviation from the rule-like monetary policies that worked well in the 1980s and 1990s, and this deviation helped break down the international monetary balance. There were similar deviations at many central banks, an apparent spillover culminating in a global great deviation. The purpose of this paper is to examine the possible causes and consequences of these spillovers, and to show that uncoordinated responses of central banks to the deviations can create an amplification mechanism which might be overcome by some form of policy coordination. |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:sip:dpaper:12-008&r=cba |
| By: | Massimiliano Caporin; Loriana Pelizzon; Francesco Ravazzolo; Roberto Rigobon |
| Abstract: | This paper analyzes the sovereign risk contagion using credit default swaps (CDS) and bond premiums for the major eurozone countries. By emphasizing several econometric approaches (nonlinear regression, quantile regression and Bayesian quantile regression with heteroskedasticity) we show that propagation of shocks in Europe's CDS has been remarkably constant for the period 2008-2011 even though a significant part of the sample periphery countries have been extremely affected by their sovereign debt and fiscal situations. Thus, the integration among the different eurozone countries is stable, and the risk spillover among these countries is not affected by the size of the shock, implying that so far contagion has remained subdue. Results for the CDS sample are confirmed by examining bond spreads. However, the analysis of bond data shows that there is a change in the intensity of the propagation of shocks in the 2003-2006 pre-crisis period and the 2008-2011 post-Lehman one, but the coefficients actually go down, not up! All the increases in correlation we have witnessed over the last years come from larger shocks and the heteroskedasticity in the data, not from similar shocks propagated with higher intensity across Europe. This is the first paper, to our knowledge, where a Bayesian quantile regression approach is used to measure contagion. This methodology is particularly well-suited to deal with nonlinear and unstable transmission mechanisms. |
| JEL: | E58 F34 F36 G12 G15 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18741&r=cba |
| By: | Christina D. Romer; David H. Romer |
| Abstract: | This paper examines an important gap in the monetary explanation of the Great Depression: the lack of a well-articulated and documented transmission mechanism of monetary shocks to the real economy. It begins by reviewing the challenge to Friedman and Schwartz’s monetary explanation provided by the decline in nominal interest rates in the early 1930s. We show that the monetary explanation requires not just that there were expectations of deflation, but that those expectations were the result of monetary contraction. Using a detailed analysis of Business Week magazine, we find evidence that monetary contraction and Federal Reserve policy contributed to expectations of deflation during the central years of the downturn. This suggests that monetary shocks may have depressed spending and output in part by raising real interest rates. |
| JEL: | E32 E58 N12 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18746&r=cba |
| By: | Stijn Claessens (International Monetary Fund); M. Ayhan Kose (International Monetary Fund); Luc Laeven (International Monetary Fund); Fabián Valencia (International Monetary Fund) |
| Abstract: | The global financial crisis of 2007-09 has led to an intensive research program analyzing a wide range of issues related to financial crises. This paper presents a summary of a forthcoming book, Financial Crises: Causes, Consequences, and Policy Responses, that includes 19 contributions examining these issues and distilling policy lessons. The book covers a wide range of crises, including banking, balance-of-payments, and sovereign debt crises. It reviews the typical patterns prior to crises, considers lessons on their antecedents, and analyzes their evolution and aftermath. It also provides valuable policy lessons on how to prevent, contain and manage financial crises. |
| Keywords: | global financial crisis, sudden stops, debt crises, banking crises, currency crises, defaults, restructuring, welfare cost, asset price busts, credit busts, prediction of crises. |
| JEL: | E32 F44 G01 E5 E6 H12 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:koc:wpaper:1301&r=cba |
| By: | Ummad Mazhar |
| Abstract: | This paper focuses on the empirical link between monetary policy transparency and output volatility. The questions addressed are: (i) Does transparency about policy processes stabilize output? (ii) Do different aspects of transparency differ qualitatively or quantitatively in terms of their effects on output volatility? Controlling for many standard structural sources of output stability, and using a data set of 80 countries over 1998 to 2007, our results show that transparency has a stabilizing influence on output volatility. However, it has less influence on output volatility than other structural sources of stabilization. Further, among the dimensions of transparency we find that operational transparency (covering control errors and macroeconomic disturbances) has the most robust stabilizing effect on output volatility. Whenever significant, political transparency (covering prioritization of objective and institutional arrangements) tends to increase output volatility, whereas other components have insignificant or negligible influence. |
| Keywords: | Monetary Policy Transparency; Central Bank Independence; Transparency Index; Output Stabilization |
| JEL: | E63 C33 |
| Date: | 2013–01–29 |
| URL: | http://d.repec.org/n?u=RePEc:sol:wpaper:2013/138935&r=cba |
| By: | Ricardo Reis |
| Abstract: | In spite of the mystique behind a central bank's balance sheet, its resource constraint bounds the dividends it can distribute by the present value of seignorage, which is a modest share of GDP. Moreover, the statutes of the Federal Reserve or the ECB make it difficult for it to redistribute resources across regions. In a simple model of sovereign default, where multiple equilibria arise if debt repudiation lowers fiscal surpluses, the central bank may help to select one equilibrium. The central bank's main lever over fundamentals is to raise inflation, but otherwise the balance sheet gives it little leeway. |
| JEL: | E58 F34 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18730&r=cba |
| By: | McCauley, Robert N. (Asian Development Bank Institute) |
| Abstract: | This paper describes the international flow of funds associated with calm and volatile global equity markets. During calm periods, portfolio investment by real money and leveraged investors in advanced countries flows into emerging markets, leading to an asymmetric asset swap (risky emerging market assets against safe reserve currency assets) and leveraging up by emerging market central banks. In declining and volatile global equity markets, these flows reverse, and, contrary to some claims, emerging market central banks draw down reserves substantially. In effect emerging market central banks then release safe assets from their reserves, supplying safe havens to global investors. |
| Keywords: | capital flows; safe assets; international flow funds; vix; global liquidity |
| JEL: | E58 F30 G15 |
| Date: | 2013–01–27 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0405&r=cba |
| By: | Stefan Thurner; Sebastian Poledna |
| Abstract: | Banks in the interbank network can not assess the true risks associated with lending to other banks in the network, unless they have full information on the riskiness of all the other banks. These risks can be estimated by using network metrics (for example DebtRank) of the interbank liability network which is available to Central Banks. With a simple agent based model we show that by increasing transparency by making the DebtRank of individual nodes (banks) visible to all nodes, and by imposing a simple incentive scheme, that reduces interbank borrowing from systemically risky nodes, the systemic risk in the financial network can be drastically reduced. This incentive scheme is an effective regulation mechanism, that does not reduce the efficiency of the financial network, but fosters a more homogeneous distribution of risk within the system in a self-organized critical way. We show that the reduction of systemic risk is to a large extent due to the massive reduction of cascading failures in the transparent system. An implementation of this minimal regulation scheme in real financial networks should be feasible from a technical point of view. |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1301.6115&r=cba |
| By: | John Vickers |
| Abstract: | Where do we stand, five years on from the start of the crisis, on progress towards banking reform? Major advances have been made, but a lot of unfinished business remains, notably on structural reform of banks. Following a stock-take of current reform initiatives, the paper reviews some economics of public policy towards banks, starting with the rationale for deposit guarantees and lender-of-last-resort support but concentrating on why governments feel compelled to provide solvency support in crisis. It then covers the economics of capital requirements – and loss-absorbency more generally – and examines why such regulation is a better approach than taxation to address systemic risk externalities, and why the public interest requires much more capital than banks would choose. The role of structural regulation in making banking systems safer is then analysed, in particular forms of separation between retail and investment banking such as ring-fencing (as in current UK reforms) and complete separation (as in the US before the repeal of Glass-Steagall). The paper concludes with some reflections on the wider European policy debate in the light of the Liikanen Report on structural reform. A central theme of the analysis is that banking reform needs a well-designed combination of policies towards loss-absorbency and structural reform. |
| Keywords: | Banking, bail-outs, capital requirements, deposit guarantees, Glass-Steagall, resolution, ring-fencing, structural reform, Volcker rule |
| JEL: | G21 G28 L51 |
| Date: | 2012–11–30 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:632&r=cba |
| By: | Harold Ngalawa (School of Economics and Finance, University of KwaZulu-Natal); Nicola Viegi (Department of Economics, University of Pretoria) |
| Abstract: | The primary objective of this paper is to investigate the interaction of formal and informal financial markets and their impact on economic activity in quasi-emerging market economies. Using a four-sector dynamic stochastic general equilibrium model with asymmetric information in the formal financial sector, we come up with three fundamental findings. First, we demonstrate that formal and informal financial sector loans are complementary in the aggregate, suggesting that an increase in the use of formal financial sector credit creates additional productive capacity that requires more informal financial sector credit to maintain equilibrium. Second, it is shown that interest rates in the formal and informal financial sectors do not always change together in the same direction. We demonstrate that in some instances, interest rates in the two sectors change in diametrically opposed directions with the implication that the informal financial sector may frustrate monetary policy, the extent of which depends on the size of the informal financial sector. Thus, the larger the size of the informal financial sector the lower the likely impact of monetary policy on economic activity. Third, the model shows that the risk factor (probability of success) for both high and low risk borrowers plays an important role in determining the magnitude by which macroeconomic indicators respond to shocks. |
| Keywords: | Informal financial sector, formal financial sector, monetary policy, general equilibrium |
| JEL: | E44 E47 E52 E58 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201306&r=cba |
| By: | Eric Schaling; Mewael F. Tesfaselassie |
| Abstract: | Available evidence supports the view that growth is faster in more open economies. In order to analyze the implications of openness and growth on determinacy and learnability of worldwide rational expectations equilibria we develop a two-country New Keynesian model with growth. We analyze these issues for contemporaneous data and expectations-based monetary policy rules. Our results highlight how growth matters for the overall effect of opening an economy to more trade, as we find that (i) under the contemporaneous data policy rule the conditions for determinacy and learnability become more stringent on account of openness but less stringent on account of growth, so that growth weakens the effect of openness, (ii) under the expectations-based policy rule the conditions for determinacy and learnability also become more stringent on account of openness while on account growth the conditions for determinacy become \emph{more} stringent (thus reinforcing the effect of openness) but those for learnability become \emph{less} stringent (thus weakening the effect of openness). As in \citet{BS09} the elasticity of intertemporal substitution is key to our result but within a framework that is consistent with long-run labor supply and balanced growth facts |
| Keywords: | trend growth,open economy,monetary policy rules,determinacy,learning |
| JEL: | E58 E61 F31 F41 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1818&r=cba |
| By: | Daron Acemoglu; Asuman Ozdaglar; Alireza Tahbaz-Salehi |
| Abstract: | We provide a framework for studying the relationship between the financial network architecture and the likelihood of systemic failures due to contagion of counterparty risk. We show that financial contagion exhibits a form of phase transition as interbank connections increase: as long as the magnitude and the number of negative shocks affecting financial institutions are sufficiently small, more “complete” interbank claims enhance the stability of the system. However, beyond a certain point, such interconnections start to serve as a mechanism for propagation of shocks and lead to a more fragile financial system. We also show that, under natural contracting assumptions, financial networks that emerge in equilibrium may be socially inefficient due to the presence of a network externality: even though banks take the effects of their lending, risk-taking and failure on their immediate creditors into account, they do not internalize the consequences of their actions on the rest of the network. |
| JEL: | D85 G01 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18727&r=cba |
| By: | Stefano Puddu (Institute of economic research IRENE, Faculty of Economics, University of Neuchâtel, Switzerland) |
| Abstract: | The goal of this paper is to provide alternative approaches to generate indexes in order to assess banking distress. Specifically, we focus on two groups of indexes that are based on the signalling approach and on the zero in ated Poisson models. The results show that the indexes based on these approaches perform better than those constructed by using the variance-equal and the factor analysis methods. Specifically, they are better at capturing relevant events, signalling distress episodes and forecasting properties. The importance of this study is two-fold: first, we contribute extra information that can be useful for forecasting banking system soundness in the aim of preventing future financial crises; second we provide alternative methods for measuring banking distress. |
| Keywords: | Stress-banking indexes, Signalling approach, Limited dependent variable methods |
| JEL: | C16 C25 G21 G33 G34 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:irn:wpaper:13-02&r=cba |
| By: | John Thanassoulis |
| Abstract: | This paper studies the consequences of a regulatory pay cap in proportion to assets onbank risk, bank value, and bank asset allocations. The cap is shown to lower banks' riskand raise banks' values by acting against a competitive externality in the labour market.The risk reduction is achieved without the possibility of reduced lending from a Tier 1increase. The cap encourages diversi cation and reduces the need a bank has to focus ona limited number of asset classes. The cap can be used for Macroprudential Regulationto encourage banks to move resources away from wholesale banking to the retail bankingsector. Such an intervention would be targeted: in 2009 a 20% reduction in remunerationwould have been equivalent to more than 150 basis points of extra tier 1 for UBS, forexample. |
| Keywords: | Remuneration, compensation, bonuses, capital conservation, systemic bank risk |
| JEL: | G01 G21 G28 G32 |
| Date: | 2012–12–17 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:636&r=cba |
| By: | Annelise Riles (Jack G. Clarke Professor of Far East Legal Studies, Cornell Law School (E-mail: ar254@cornell.edu)) |
| Abstract: | A central challenge for international financial regulatory systems today is how to manage the impact of Global Systemically Important Financial Institutions (G-SIFIs) on the global economy, given the interconnected and pluralistic nature of regulatory regimes. This article focuses on the Financial Stability Board (FSB), and proposes a new research agenda regarding the FSBfs emerging regulatory forms. In particular, it examines the regulatory architecture of New Governance (NG), a variety of approaches that are supposed to be more reflexive, collaborative, and experimental than traditional forms of governance. A preliminary conclusion is that NG tools may be effective in resolving some kinds of problems in a pluralistic regulatory order, but they are unlikely to be suitable to all problems. As such, this article proposes that analyses of the precise conditions in which NG mechanisms may or may not be effective are necessary. It concludes with some recommendations for improving the NG model. |
| Keywords: | International Financial Regulation, Global Systemically Important Financial Institutions, Financial Stability Board, Regulatory Reform, New Governance, Regulatory Pluralism |
| JEL: | K23 K33 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:13-e-01&r=cba |
| By: | Fabian Fink (Department of Economics, University of Konstanz, Germany); Yves S. Schüler (Department of Economics, University of Konstanz, Germany) |
| Abstract: | We provide empirical evidence that US financial stress shocks (US-FSSs) are an important driver for economic dynamics and fluctuations in emerging market economies (EMEs). Applying a structural vector auto regression, we analyze the international transmission of US-FSSs to eight EMEs using monthly data from 1999 to 2012. US-FSSs are identified as unexpected changes in the financial conditions index of the Federal Reserve Bank of Chicago. Findings indicate that a typical EME experiences similar negative effects as the US economy in response to US-FSSs. Our results emphasize that the transmission through international financial interconnections is dominant, while contagion through trade is inessential. Further, with regard to fluctuations in real economic activity, US-FSSs are as important as all other external factors jointly. In general, US-FSSs represent a crucial driver for volatility in the emerging world; also at business cycle frequencies. |
| Keywords: | Financial Stress Shocks, International Transmission, Emerging Markets, SVAR |
| JEL: | E44 F30 G10 |
| Date: | 2013–01–18 |
| URL: | http://d.repec.org/n?u=RePEc:knz:dpteco:1301&r=cba |
| By: | Cagri S. Kumruy; Saran Sarntisartz |
| Abstract: | A signicant number of individuals are unwilling to deposit their savings into the banking sector since it does not operate according to their religious beliefs. In this paper we provide a model that aims to answer the following questions: First, under what conditions an alternative banking system would arise? Second, what are the growth, and welfare implications of these banking systems? Our model shows that an alternative banking system would arise if individuals have religious concerns. Moreover, we show that in an economy populated with a certain number of religiously concerned individuals, the existence of an alternative baking system can generate relatively higher growth and improve welfare. |
| JEL: | E21 E62 H55 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:acb:cbeeco:2013-601&r=cba |
| By: | Mototsugu Shintani (Deaprtment of Economics, Vanderbilt University); Akiko Terada-hagiwara (Economics and Research Department, Asian Development Bank); Tomoyoshi Yabu (Faculty of Business and Commerce, Keio University) |
| Abstract: | This paper investigates the relationship between the exchange rate pass-through (ERPT) and inflation by estimating a nonlinear time series model. Based on a simple theoretical model of ERPT determination, we show that the dynamics of ERPT can be well approximated by a class of smooth transition autoregressive (STAR) models using the past inflation rate as a transition variable. We employ several U-shaped transition functions in the estimation of the time-varying ERPT to US domestic prices. The estimation result suggests that declines in the ERPT during the 1980s and 1990s are associated with lowered inflation. |
| Keywords: | import prices, inflation indexation, pricing-to-market, smooth transition autoregressive models, sticky prices. |
| JEL: | N0 |
| Date: | 2012–12–09 |
| URL: | http://d.repec.org/n?u=RePEc:van:wpaper:vuecon-12-00008&r=cba |
| By: | Weihong HUANG (Division of Economics, Nanyang Technological University, Singapore 637332, Singapore); Zhenxi CHEN (Division of Economics, Nanyang Technological University, Singapore 637332, Singapore) |
| Abstract: | With the development of globalization and regional market integration, regional markets with common currency emerge. We develop a heterogeneous agents model based on the frameworks of Day and Huang (1990) as well as Westerhoff and Dieci (2006). Two markets using same currency are populated by chartists and fundamentalists. Market linkage is established by allowing investors to trade in both markets. One of the consequences of market linkage is market pooling, in which investors from each market interact with each other and determine the price movements of the market system. The market that is more stable initially exerts stabilizing force on the market system while itself might su¤er from destabilizing effect. Market system based on the model demonstrates the capability to generate important stylized facts of financial markets, in particular the significant cross-correlation between two markets. |
| Keywords: | Financial multi-market interactions, Market integration, Market Pooling, Chaos, Heterogeneous beliefs |
| JEL: | C61 D84 G15 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:nan:wpaper:1210&r=cba |
| By: | Daniel Fricke; Thomas Lux |
| Abstract: | Previous literature on statistical properties of interbank loans has reported various power-laws, particularly for the degree distribution (i.e. the distribution of credit links between institutions). In this paper, we revisit data for the Italian interbank network based on overnight loans recorded on the e-MID trading platform during the period 1999-2010 using both daily and quarterly aggregates. In con- trast to previous authors, we find no evidence in favor of scale-free networks. Rather, the data are best described by negative Binomial distributions. For quarterly data, Weibull, Gamma, and Exponential distributions tend to provide comparable ts. We find comparable re- sults when investigating the distribution of the number of transactions, even though in this case the tails of the quarterly variables are much fatter. The absence of power-law behavior casts doubts on the claim that interbank data fall into the category of scale-free networks |
| Keywords: | interbank market, network models |
| JEL: | G21 G01 E42 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1819&r=cba |