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Free-riding on Liquidity in the Colombian LVPS

Author

Listed:
  • Constanza Martínez

    (Banco de la República)

  • Freddy Cepeda

    (Banco de la República)

Abstract

The functioning of large-value payment systems (LVPSs) can be affected when some of its participants voluntarily decide to delay their payments until they can totally fund them with the payments received from other participants. This behaviour, known as the free-rider problem, can cause an under-provision of liquidity in LVPSs that operate under a RTGS (real-time gross settlement) mode. With the aim of determining whether there are free-riders in the Colombian LVPS (CUD), we empirically tested this payment strategy: firstly, using regression techniques (quantile regression models) and secondly, computing the empirical quantiles. Our results indicate that there is evidence of this problem in the Colombian case; however, their negative effects on CUD are negligible.

Suggested Citation

  • Constanza Martínez & Freddy Cepeda, 2016. "Free-riding on Liquidity in the Colombian LVPS," Borradores de Economia 977, Banco de la Republica de Colombia.
    • Handle: RePEc:bdr:borrec:977
    DOI: 10.32468/be.977
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    References listed on IDEAS

    as
    1. Carlos Léon & Clara Machado & Freddy Cepeda & Miguel Sarmiento, 2011. "Too-connected-to-fail Institutions and Payments System’s Stability: Assessing Challenges for Financial Authorities," Borradores de Economia 644, Banco de la Republica de Colombia.
    2. James J. McAndrews & Simon M. Potter, 2002. "Liquidity effects of the events of September 11, 2001," Economic Policy Review, Federal Reserve Bank of New York, vol. 8(Nov), pages 59-79.
    3. Andrei Shleifer & Robert Vishny, 2011. "Fire Sales in Finance and Macroeconomics," Journal of Economic Perspectives, American Economic Association, vol. 25(1), pages 29-48, Winter.
    4. Constanza Martínez & Freddy Cepeda, 2015. "Reaction Functions of the Participants in Colombia’s Large-value Payment System," Borradores de Economia 875, Banco de la Republica de Colombia.
    5. Roger Koenker & Kevin F. Hallock, 2001. "Quantile Regression," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 143-156, Fall.
    6. Christopher Becher & Marco Galbiati & Merxe Tudela, 2008. "The timing and funding of CHAPS sterling payments," Economic Policy Review, Federal Reserve Bank of New York, vol. 14(Sep), pages 113-133.
    7. Kahn, Charles M. & Roberds, William, 2009. "Why pay? An introduction to payments economics," Journal of Financial Intermediation, Elsevier, vol. 18(1), pages 1-23, January.
    8. Manning, Mark & Nier, Erlend & Schanz, Jochen (ed.), 2009. "The Economics of Large-value Payments and Settlement: Theory and Policy Issues for Central Banks," OUP Catalogue, Oxford University Press, number 9780199571116.
    9. Galbiati, Marco & Soramaki, Kimmo, 2010. "Liquidity-saving mechanisms and bank behaviour," Bank of England working papers 400, Bank of England.
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    More about this item

    Keywords

    Payment system; free riding on liquidity; liquidity hoarding; quantile regression models.;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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