No. 1160 - Pairwise trading in the money market during the European sovereign debt crisis

This paper studies over-the-counter (OTC) trading in the unsecured interbank market for euro funds. The goal of our analysis is to identify the determinants of the probability of trading, the bilateral rate and the quantity exchanged during the European sovereign debt crisis.

We show how the specific features of this market bring to a non-standard estimation framework. A dyadic econometric model with shadow rates is proposed to control for possibly endogenous matching with the counterparty. A unique dataset containing banks characteristics and bilateral trades is built and used to study the evolution of trading patterns.

The estimates bring mild evidence towards the existence of shadow rates. Active monitoring decreased market access to low equity and illiquid borrowers, while dispersion in rates and quantities is mainly driven by banks' nationality, especially during the peak of the crisis.