Do market-based networks reflect true exposures between banks?

Authors: Dilyara Salakhova and Madina Karamysheva

Abstract: Due to the lack and poor access to the data on real exposures between banks, several methods have been proposed to reconstruct a network using market data. However, the question is what does the market-based network price? Does it represent well exposure-based networks? Which market-based approach is better? In this paper, we replicate several well-known market-based networks and build true exposure networks. We provide network characteristics comparison across different types of networks. We also conduct a regression analysis for finding the relative importance of different exposures. We find that networks evolve over time, while the global network structure remains stable. Regression analysis shows that the market identifies two banks as connected when they have similar business models defined by overlapping portfolios.