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An experimental examination of interbank markets

Published online by Cambridge University Press:  14 March 2025

Douglas D. Davis Open the ORCID record for Douglas D. Davis [Opens in a new window] ,
Oleg Korenok  and
John P. Lightle
Douglas D. Davis*
Affiliation:
Virginia Commonwealth University, Richmond, USA
Oleg Korenok
Affiliation:
Virginia Commonwealth University, Richmond, USA
John P. Lightle
Affiliation:
Virginia Commonwealth University, Richmond, USA
*
[email protected]
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Abstract

We use experimental methods to evaluate a simplified interbank market. The design is a laboratory adaptation of the analysis of interbank market fragility by Allen and Gale (J Eur Econ Assoc 2:1015–1048), and features symmetric banks who allocate deposit endowments between cash and illiquid assets prior to the incidence of a shock. Following the shock liquidity-deficient banks trade assets for cash. Treatments include variations in the shock type, as well as alterations in the range of permissible asset prices. Consistent with Allen and Gale, we find that while interbank trading substantially increases investment activity, the markets are frequently characterized by price variability and a stochastic distribution of investment outcomes.

Keywords

Interbank marketExperimental methodsFinancial Market Stability

JEL classification

C9: Design of Experiments G21: Banks • Depository Institutions • Micro Finance Institutions • Mortgages
Type
Original Paper
Information
Experimental Economics , Volume 22 , Issue 4 , December 2019 , pp. 954 - 979
Copyright
Copyright © 2018 Economic Science Association

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Footnotes

Electronic supplementary material The online version of this article (https://doi.org/10.1007/s10683-018-9595-y) contains supplementary material, which is available to authorized users.

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