Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/93090
Authors: 
Anand, Kartik
Craig, Ben
von Peter, Goetz
Year of Publication: 
2014
Series/Report no.: 
Discussion Paper, Deutsche Bundesbank 02/2014
Abstract: 
The pattern of financial linkages is important in many areas of banking and finance. Yet bilateral linkages are often unknown, and maximum entropy serves as the leading method for estimating unobserved counterparty exposures. This paper proposes an efficient alternative that combines information-theoretic arguments with economic incentives to produce more realistic interbank networks that preserve important characteristics of the original interbank market. The method loads the most probable links with the largest exposures consistent with the total lending and borrowing of each bank, leading to networks with minimum density. When used in a stress testing context, the minimum density approach performs better than maximum entropy and also permits more robust analysis. Using the two benchmarks side by side helps identify a range of possible systemic risk outcomes when the true pattern of counterparty exposures is unknown.
Subjects: 
interbank markets
networks
entropy
intermediation
systemic risk
JEL: 
G21
L14
D85
C63
ISBN: 
978-3-95729-009-0
Document Type: 
Working Paper

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