Lehrstuhl für Geld, Währung und Internationale Finanzmärkte

Working Papers

Hubs and resilience: towards more realisitic models of the interbank markets

by M. Montagna and T. Lux

Abstract:

This paper uses a toy financial system to study systemic risk in scale-free interbank networks. Networks are produced according to a fitness algorithm, combined with a representation of the balance sheets of the banks. Our generating processes for interbank networks are designed in a way to reproduce the frequently documented features of disassortative behavior, power laws in the degree distributions and power laws in the distribution of bank sizes. The results show the presence of a particular shell structure affecting the spread of an endogenous shock. 

 

Network Analysis of the e-Mid Overnight Money Market: The Informational Value of Different Aggregation Levels for Intrinsic Dynamic Processes

by K. Finger, D. Fricke and T. Lux

Abstract: In this paper, we analyze the network properties of the Italian e-MID data based on overnight loans during the period 1999-2010. We show that the networks appear to be random at the daily level, but contain significant non-random structure for longer aggregation periods. In this sense, the daily networks cannot be considered as being representative for the underlying `latent' network. Rather, the development of various network statistics under time aggregation points toward strong non-random determinants of link formation. We also identify the global financial crisis as a significant structural break for many network measures.

 

 

On the Distribution of Links in the Interbank Network: Evidence from the e-MID Overnight Money Market

 

by D. Fricke and T. 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. 

 

Structure in the Italian Overnight Loan Market

by M. Raddant

 Abstract:

We analyze the Italian interbank loan market from 1999 until 2010. The analysis of net trade flows shows a high imbalance caused by few large net borrowers in the market. The trading volume shows a significant drop starting in 2007, which accelerates with the Lehman default in late 2008. The network, based on trading relationships, is very dense. Hence, we try to identify strong links by looking for preferential lending relationships expressed by discounts in the loan rate. Furthermore, we estimate the dynamics of credit spreads for each bank and find that economically significant spreads for the overnight market only developed in 2010. The analysis of bilateral loan relationships reveals that in the pre-crisis era large net borrowers used to borrow at a slight discount. In the post-Lehman era borrowers with large net exposures paid more than the average market rate, which shows that the risk evaluation of market participants has changed considerably.

 

Trading Strategies in the Overnight Money Market: Evidence from the e-MID Trading Platform

 

by T. Lux and D. Fricke

Abstract:

We explore the network topology arising from a dataset of the overnight interbank transactions on the e-MID trading platform from January 1999 to December 2010. In order to shed light on the hierarchical structure of the banking system, we estimate different versions of a core-periphery model. Our main findings are: (1) A core-periphery structure provides a better fit for these interbank data than alternative network models, (2) the identified core is quite stable over time, consisting of roughly 28% of all banks before the global financial crisis (GFC) and 23% afterwards, (3) the majority of core banks can be classified as intermediaries, i.e. as banks both borrowing and lending money, (4) allowing for asymmetric `coreness’ with respect to lending and borrowing considerably improves the fit, and reveals more concentration in borrowing than lending activity of money center banks. During the financial crisis of 2008, the reduction of interbank lending was mainly due to core banks’ reducing their numbers of active outgoing links.

 

 

Network Analysis of the e-MID Overnight Money Market: The Informational Value of Different Aggregation Levels for Intrinsic Dynamic Processes

 

by K. Finger, D. Fricke and T. Lux

 

Abstract:

In this paper, we analyze the network properties of the Italian e-MID data based on overnight loans during the period 1999-2010. We show that the networks appear to be random at the daily level, but contain significant non-random structure for longer aggregation periods. In this sense, the daily networks cannot be considered as being representative for the underlying `latent' network. Rather, the development of various network statistics under time aggregation points toward strong non-random determinants of link formation. We also identify the global financial crisis as a significant structural break for many network measures.

 

The Small Core of the German Corporate Board Network: New Evidence from 2010

 

by M. Milaković, S. Alfarano and T. Lux

Abstract:

Milaković, Alfarano and Lux (2010) have identified a small core of directors who are both highly central to the entire network of German corporate boards as well as closely connected among themselves. While their analysis has been based on data for the management and supervisory boards of a sample of 287 publicly traded companies with high market capitalization as of May 2008, a subsequent study by Milakovic', Raddant and Birg (2010) using somewhat smaller samples from the years 1993, 1999, and 2005 has confirmed that this closely connected core is a persistent stylized fact for the German corporate sector. In this note, we provide an update of our previous results using the composition of management and supervisory boards as of December, 2010. Again, almost all qualitative properties of previous samples are confirmed despite considerable turnover within the group of persons constituting the network core.

 

 

Evolvement of Uniformity and Volatility in the Stressed Global Financial Village

 

by D.Y. Kenett, M. Raddant, T. Lux and E. Ben-Jacob

 Abstract:

In the current era of strong worldwide market couplings the global financial village became highly prone to systemic collapses, events that can rapidly sweep through out the entire village. Here we present a new methodology to assess and quantify inter-market relations. The approach is based on the correlations between the market index, the index volatility, the market Index Cohesive Force and the meta-correlations (correlations between the intra-correlations.) We investigated the relations between six important world markets - U.S., U.K., Germany, Japan, China and India from January 2000 until December 2010. We found that while the developed ``western'' markets (U.S., U.K., Germany), are highly correlated, the interdependencies between these markets and the developing ``eastern'' markets (India and China) are very volatile and with noticeable maxima at times of global world events (2001: 9/11-attacks, 2003: Iraq war, SARS, etc). The Japanese market switches ``identity'' - it switches between periods of high meta-correlations with the ``western'' markets and periods that it behaves more similar to the ``eastern'' markets. These and additional reported findings illustrate that the methodological framework provides a way to quantify the evolvement of interdependencies in the global market, to evaluate a world financial network and quantify changes in the world inter market relations. Such changes can be used as precursors to the agitation of the global financial village. Hence, the new approach can help to develop a sensitive ``financial seismograph'' to detect early signs of global financial crises so they can be treated before developed into world wide events.