Finance Seminar（2016-08）

Topic:Network Risk and Key Players: A Structural Analysis of Interbank Liquidity

Speaker:Kathy Yuan, London School of Economics and Political Science

Time:Wednesday, 6 April, 10:00-11:30

Place:Room 217, Guanghua Building 2

Abstract:

We estimate the liquidity multiplier and study systemic liquidity risk using a net-work model of interbank market. Banks' liquidity holding decision is modelled as a simultaneous game on a borrowing and lending network. We show that at the Nash equilibrium, the contributions of each bank to the network liquidity level and liquidity risk are distinct functions of its indegree and outdegree Katz-Bonacich centrality measures. The network can dampen or amplify individual banks' shocks. Using a sterling interbank network database from January 2006 to September 2010, we estimate the model in a spatial error framework, and find evidence for a substantial, and time varying, network risk: in the period before the Lehman crisis, the network is cohesive and liquidity holding decisions are complementary and there is a large network liquidity multiplier; during the 2007-08 crisis, the network becomes less clustered and liquidity holding less dependent on the network; after the crisis, during Quantitative Easing, the network liquidity multiplier becomes negative, implying a lower network potential for generating liquidity.

Introduction:

Professor Yuan received her Ph.D. in Economics from Massachusetts Institute of Technology. Prior to obtaining her Ph.D., she worked briefly in the Emerging Markets Trading Desk at J. P. Morgan (now JPMorgan-Chase).

Her research focuses on developing new asset pricing theories with heterogeneous information and market frictions and testing their empirical implications. In the past few years, she has examined how crises spread through international financial markets and how introducing benchmark securities such as treasury bonds or stock indices improves the overall market liquidity. She is currently working on modeling systematic risk using network theory, studying higher order beliefs and strategic complementarities in the financial market, building dynamic and multi-asset REE models of asset prices with short-sale and borrowing constraints, constructing new metrics for performance evaluations, and developing new asset pricing tests based on revealed beliefs in investor portfolio holdings.

She is a member of FMG, CEPR and has recently received Houblon-Norman Fellowship at the Bank of England.

//www.lse.ac.uk/finance/people/profiles/KathyYuan.aspx

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