CAREER: Interdealer Networks and the Distribution of Credit Risk


Jennifer La'O
Associate Professor of Economics


This project examines how the network of trading relationships determined by the interdealer market determines how US banks interact on this market and how this affects the banks' ultimate exposures to credit risk. The Financial Crisis of 2007 - 2009 and ensuing recession highlighted the importance of bank interconnectedness. However, facts about the trades and positions of complex financial institutions are generally difficult to obtain. The PI and collaborators will develop an innovative new data source; their data analysis will focus on understanding and measuring systemic vulnerabilities in the banking system. The PI will also engage in innovative educational activities, including curriculum development on network issues in financial markets and a mentoring effort aimed at undergraduate women interested in careers in macroeconomics. The results will be valuable to central banks and financial regulators who work to promote US prosperity through a stable financial system.

The PI and collaborators will match and analyze detailed data from the corporate bond, credit default swap, and syndicated loans markets at the financial institution level. By aggregating flows in these markets for each dealer, the team will be able to construct measures of gross and net exposures of intermediaries to credit risk, and will also create a network map of the interbank market. They will answer questions about what dealers are most central in these markets, what types of dealers have the largest exposure to credit risk, and whether/how characteristics of dealers and counterparties affect derivative prices.