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Short-Term Liquidity Contagion in the Interbank Market

Author

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  • León, C.

    (Tilburg University, Center For Economic Research)

  • Martínez, Constanza
  • Cepeda, Freddy

Abstract

We implement a modified version of DebtRank, a measure of systemic impact inspired in feedback centrality, to recursively measure the contagion effects caused by the default of a selected financial institution. In our case contagion is a liquidity issue, measured as the decrease in financial institutions’ short-term liquidity position across the Colombian interbank network. Concurrent with related literature, unless contagion dynamics are preceded by a major –but unlikely- drop in the short-term liquidity position of all participants, we consistently find that individual and systemic contagion effects are negligible. We find that negative effects resulting from contagion are concentrated in a few financial institutions. However, as most of their impact is conditional on the occurrence of unlikely major widespread illiquidity events, and due to the subsidiary contribution of the interbank market to the local money market, their overall systemic importance is still to be confirmed.
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Suggested Citation

  • León, C. & Martínez, Constanza & Cepeda, Freddy, 2016. "Short-Term Liquidity Contagion in the Interbank Market," Discussion Paper 2016-018, Tilburg University, Center for Economic Research.
    • Handle: RePEc:tiu:tiucen:c49d4eff-9bfd-4a01-af6f-7af97ef07584
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    1. Tabak, Benjamin Miranda & Silva, Thiago Christiano & Fiche, Marcelo Estrela & Braz, Tércio, 2021. "Citation likelihood analysis of the interbank financial networks literature: A machine learning and bibliometric approach," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 562(C).

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    More about this item

    Keywords

    financial networks; contagion; default; liquidity; DebtRank;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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