Short-Term Liquidity Contagion in the Interbank Market

C.E. Leon Rincon, Constanza Martínez, Freddy Cepeda

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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.
Original languageEnglish
Place of PublicationTilburg
PublisherCentER, Center for Economic Research
Number of pages33
Volume2016-018
Publication statusPublished - 20 Apr 2016

Publication series

NameCentER Discussion Paper
Volume2016-018

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Keywords

  • financial networks
  • contagion
  • default
  • liquidity
  • DebtRank

Cite this

Leon Rincon, C. E., Martínez, C., & Cepeda, F. (2016). Short-Term Liquidity Contagion in the Interbank Market. (CentER Discussion Paper; Vol. 2016-018). Tilburg: CentER, Center for Economic Research.