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An experimental examination of interbank markets

Author

Listed:
  • Douglas D. Davis

    (Virginia Commonwealth University)

  • Oleg Korenok

    (Virginia Commonwealth University)

  • John P. Lightle

    (Virginia Commonwealth University)

Abstract

We use experimental methods to evaluate a simplified interbank market. The design is a laboratory adaptation of the analysis of interbank market fragility by Allen and Gale (J Eur Econ Assoc 2:1015–1048), and features symmetric banks who allocate deposit endowments between cash and illiquid assets prior to the incidence of a shock. Following the shock liquidity-deficient banks trade assets for cash. Treatments include variations in the shock type, as well as alterations in the range of permissible asset prices. Consistent with Allen and Gale, we find that while interbank trading substantially increases investment activity, the markets are frequently characterized by price variability and a stochastic distribution of investment outcomes.

Suggested Citation

  • Douglas D. Davis & Oleg Korenok & John P. Lightle, 2019. "An experimental examination of interbank markets," Experimental Economics, Springer;Economic Science Association, vol. 22(4), pages 954-979, December.
    • Handle: RePEc:kap:expeco:v:22:y:2019:i:4:d:10.1007_s10683-018-9595-y
    DOI: 10.1007/s10683-018-9595-y
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    References listed on IDEAS

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    Cited by:

    1. Hubert J. Kiss & Ismael Rodriguez-Lara & Alfonso Rosa-Garcia, 2022. "Experimental bank runs," Chapters, in: Sascha Füllbrunn & Ernan Haruvy (ed.), Handbook of Experimental Finance, chapter 25, pages 347-361, Edward Elgar Publishing.
      • Hubert J. Kiss & Ismael Rodriguez-Lara & Alfonso Rosa-Garcia, 2021. "Experimental Bank Runs," ThE Papers 21/03, Department of Economic Theory and Economic History of the University of Granada..
    2. Cox, Caleb & Davis, Douglas & Korenok, Oleg & Lightle, John, 2023. "Stress tests and information disclosure: An experimental analysis," Journal of Banking & Finance, Elsevier, vol. 154(C).
    3. Kiss, Hubert J. & Rodriguez-Lara, Ismael & Rosa-Garcia, Alfonso, 2022. "Preventing (panic) bank runs," Journal of Behavioral and Experimental Finance, Elsevier, vol. 35(C).

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    More about this item

    Keywords

    Interbank market; Experimental methods; Financial Market Stability;
    All these keywords.

    JEL classification:

    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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