RDP 2016-11: Identifying Interbank Loans from Payments Data Appendix D: Derivation of the Model

For simplicity, this appendix assumes that there are no rollovers and that there is no persistence in ui,t. The intuition when rollovers and persistence are included is the same. Suppose the true data-generating process is (where γi,t is the ‘net share’ in session i of day t):

With the net share varying over time, ui,t consists of loan-identification errors only. However, suppose we estimate:

Then, by combining Equations (D1) and (D2):

Estimating a constant net share causes the conditional variance of Inline Equation (conditional on nrt, Inline Equation and Inline Equation to differ from the variance that does not condition on nrt:

Assuming changes in γi,t are independent of both nrt and ui,t:

Equation (D4) justifies the functional form we assume for the conditional heteroskedasticity in our model.

Now suppose the parameters are estimated using ordinary least squares (OLS). By construction, the estimated sample covariance between nrt and Inline Equation will be zero. Assuming the conditions required for the weak law of large numbers hold, the sample covariance converges in probability to the population covariance. Therefore, the following holds for the population covariance:

Which, using Equation (D3), can be rewritten as:

If γi,t and nrt are independent, then the population covariance can be expanded to:

Using Equations (D5) and (D6), and re-arranging, gives the following limit value for Inline Equation (i.e. as T → ∞, where T is the sample size):

So, in the limit, the OLS estimator of the constant net share (Inline Equation) will equal the mean of the net share plus a bias term caused by any correlation between non-rolled loans and the loan-identification error.

If the bias term is non-zero, then an estimator for Inline Equation that accounts for the conditional heteroskedasticity of Inline Equation (such as the Gaussian maximum likelihood estimator (MLE) used in Section 5.3) will, in general, converge to a different point than the OLS estimator. However, it can be shown that the point of convergence of the Gaussian MLE will have the same form as the OLS estimator; being equal to the mean of the net share plus a bias term:

where f(nrt) is the limiting conditional variance of Inline Equation. This bias term equals the bias term for the OLS estimator if f(nrt) is a constant. As with the OLS bias term, this bias term will equal zero if nrt and ui,t are uncorrelated.