Testing Information Diffusion in the Decentralized Unsecured Market for Euro Funds

Abstract

Average rates in the decentralized unsecured market for euro funds, like the EONIA for the overnight maturity, are fundamental indicators of the smooth transmission of the signal rate by the central bank. Public information plays an important role in this context, as key interest rates are set by the central bank and average market rates are published daily, constituting common knowledge. Nevertheless, according to the theoretical literature on over-the-counter markets, private information may have an important role in a decentralized market. The diffusion of private information can generate prices that depend on the decentralized market structure. This is the first paper to use an ad hoc (network) version of the spatial autoregressive model to assess the presence of this mechanism. I propose a simple methodology to test whether the joint distribution of rates depends on the interbank network structure and to estimate information diffusion strength. The method is applied to a unique dataset collecting unsecured interbank loans and characteristics of banks operating in European central bank money. A wide time span including sovereign debt crises in the euro area is considered. I find that information diffusion played a greater role during periods dominated by strong uncertainty.

Pairwise Trading in the Money Market During the European Sovereign Debt Crisis

“…Some of those patterns have been recently studied. Among the others,Affinito (2012) andCocco et al (2009) investigate the role of relationship lending,Rainone (2015) andGabrieli and Georg (2014) study the role of the network structures.5 For example, if unobservable variables determine both the probability that two bank get in touch and the rate (quantity) they agree (exchange), then the estimated parameters of loans' outcomes -i.e. rate and quantity-can be biased as well.…”