Finance and Economics Discussion Series (FEDS)
October 2015
Interconnectedness in the Interbank Market
Celso Brunetti, Jeffrey H. Harris, Shawn Mankad, and George Michailidis
Abstract:
We study the behavior of the interbank market before, during and after the 2008 financial crisis. Leveraging recent advances in network analysis, we study two network structures, a correlation network based on publicly traded bank returns, and a physical network based on interbank lending transactions. While the two networks behave similarly pre-crisis, during the crisis the correlation network shows an increase in interconnectedness while the physical network highlights a marked decrease in interconnectedness. Moreover, these networks respond differently to monetary and macroeconomic shocks. Physical networks forecast liquidity problems while correlation networks forecast financial crises.
Keywords: Interconnectedness, correlation network, financial crisis, interbank market, physical network
DOI: http://dx.doi.org/10.17016/FEDS.2015.090
PDF: Full Paper