TY - JOUR
T1 - Filtering for risk assessment of interbank network
AU - Simaan, Majeed
AU - Gupta, Aparna
AU - Kar, Koushik
N1 - Publisher Copyright:
© 2019 Elsevier B.V.
PY - 2020/1/1
Y1 - 2020/1/1
N2 - Our paper contributes to the recent macroprudential policy addressing the resilience of financial systems in terms of their interconnectedness. We argue that beneath an interbank market, there is a fundamental latent network that affects the liquidity distributions among banks. To investigate the interbank market, we propose a framework that identifies such latent network using a statistical learning procedure. The framework reverse engineers overnight signals observed as banks conduct their reserve management on a daily basis. Our simulation-based results show that possible disruptions in funds supply are highly affected by the interconnectedness of the latent network. Hence, the proposed framework serves as an early warning system for regulators to monitor the overnight market and to detect ex-ante possible disruptions based on the inherent network characteristics.
AB - Our paper contributes to the recent macroprudential policy addressing the resilience of financial systems in terms of their interconnectedness. We argue that beneath an interbank market, there is a fundamental latent network that affects the liquidity distributions among banks. To investigate the interbank market, we propose a framework that identifies such latent network using a statistical learning procedure. The framework reverse engineers overnight signals observed as banks conduct their reserve management on a daily basis. Our simulation-based results show that possible disruptions in funds supply are highly affected by the interconnectedness of the latent network. Hence, the proposed framework serves as an early warning system for regulators to monitor the overnight market and to detect ex-ante possible disruptions based on the inherent network characteristics.
KW - Financial networks
KW - Hidden Markov models
KW - Liquidity risk management
KW - OR in banking
KW - Systemic risk
UR - http://www.scopus.com/inward/record.url?scp=85068557510&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=85068557510&partnerID=8YFLogxK
U2 - 10.1016/j.ejor.2019.06.049
DO - 10.1016/j.ejor.2019.06.049
M3 - Article
AN - SCOPUS:85068557510
SN - 0377-2217
VL - 280
SP - 279
EP - 294
JO - European Journal of Operational Research
JF - European Journal of Operational Research
IS - 1
ER -