Authors:
Giulia Iori, City University London
Burcu Kapar, City University London
Jose Olmo , University of Southampton
Paper number: 1402
This paper studies the relationship between bank characteristics, such as size, nationality, operating currency and sovereign debt in the parent country, and the distribution of funding spreads observed in the European interbank money market. Our setup is a pseudo-panel with a random number of international banks acting in the interbank market in each period. We develop new econometric tools for panel data with random effects and discrete covariates, such as a nonparametric kernel estimator of the distribution function of the response variable conditional on a set of covariates and a consistent test of first order stochastic dominance. Our empirical results, based on these tests, shed light on the survivorship bias in the e-Mid market, and reveal the existence of a risk premium on small banks, banks with currencies different from the Euro, and banks based on countries under sovereign debt distress in the periphery of the European Union.