scholarly journals An Economic Examination of Collateralization in Different Financial Markets

2019 ◽  
Author(s):  
Tim Xiao
Keyword(s):  
Risk Factors ◽  
Credit Risk ◽  
Financial Markets ◽  
Counterparty Risk ◽  
Financial Contracts ◽  
Theoretical Justification ◽  
Data Set ◽  
Unique Data ◽  
Economic Significance ◽  
The Difference

This paper attempts to assess the economic significance and implications of collateralization in different financial markets, which is essentially a matter of theoretical justification and empirical verification. We present a comprehensive theoretical framework that allows for collateralization adhering to bankruptcy laws. As such, the model can back out differences in asset prices due to collateralized counterparty risk. This framework is very useful for pricing outstanding defaultable financial contracts. By using a unique data set, we are able to achieve a clean decomposition of prices into their credit risk factors. We find empirical evidence that counterparty risk is not overly important in credit-related spreads. Only the joint effects of collateralization and credit risk can sufficiently explain unsecured credit costs. This finding suggests that failure to properly account for collateralization may result in significant mispricing of financial contracts. We also analyze the difference between cleared and OTC markets.

scholarly journals An Economic Examination of Collateralization in Different Financial Markets

2019 ◽  
Author(s):  
Tim Xiao
Keyword(s):  
Risk Factors ◽  
Credit Risk ◽  
Financial Markets ◽  
Counterparty Risk ◽  
Financial Contracts ◽  
Theoretical Justification ◽  
Data Set ◽  
Unique Data ◽  
Economic Significance ◽  
The Difference

This paper attempts to assess the economic significance and implications of collateralization in different financial markets, which is essentially a matter of theoretical justification and empirical verification. We present a comprehensive theoretical framework that allows for collateralization adhering to bankruptcy laws. As such, the model can back out differences in asset prices due to collateralized counterparty risk. This framework is very useful for pricing outstanding defaultable financial contracts. By using a unique data set, we are able to achieve a clean decomposition of prices into their credit risk factors. We find empirical evidence that counterparty risk is not overly important in credit-related spreads. Only the joint effects of collateralization and credit risk can sufficiently explain unsecured credit costs. This finding suggests that failure to properly account for collateralization may result in significant mispricing of financial contracts. We also analyze the difference between cleared and OTC markets.

scholarly journals An Economic Examination of Collateralization in Different Financial Markets

2019 ◽  
Author(s):  
Tim Xiao
Keyword(s):  
Risk Factors ◽  
Credit Risk ◽  
Financial Markets ◽  
Counterparty Risk ◽  
Financial Contracts ◽  
Theoretical Justification ◽  
Data Set ◽  
Unique Data ◽  
Economic Significance ◽  
The Difference

This paper attempts to assess the economic significance and implications of collateralization in different financial markets, which is essentially a matter of theoretical justification and empirical verification. We present a comprehensive theoretical framework that allows for collateralization adhering to bankruptcy laws. As such, the model can back out differences in asset prices due to collateralized counterparty risk. This framework is very useful for pricing outstanding defaultable financial contracts. By using a unique data set, we are able to achieve a clean decomposition of prices into their credit risk factors. We find empirical evidence that counterparty risk is not overly important in credit-related spreads. Only the joint effects of collateralization and credit risk can sufficiently explain unsecured credit costs. This finding suggests that failure to properly account for collateralization may result in significant mispricing of financial contracts. We also analyze the difference between cleared and OTC markets.

scholarly journals An Economic Examination of Collateralization in Different Financial Markets

2019 ◽  
Author(s):  
Tim Xiao
Keyword(s):  
Risk Factors ◽  
Credit Risk ◽  
Financial Markets ◽  
Counterparty Risk ◽  
Financial Contracts ◽  
Theoretical Justification ◽  
Data Set ◽  
Unique Data ◽  
Economic Significance ◽  
The Difference

This paper attempts to assess the economic significance and implications of collateralization in different financial markets, which is essentially a matter of theoretical justification and empirical verification. We present a comprehensive theoretical framework that allows for collateralization adhering to bankruptcy laws. As such, the model can back out differences in asset prices due to collateralized counterparty risk. This framework is very useful for pricing outstanding defaultable financial contracts. By using a unique data set, we are able to achieve a clean decomposition of prices into their credit risk factors. We find empirical evidence that counterparty risk is not overly important in credit-related spreads. Only the joint effects of collateralization and credit risk can sufficiently explain unsecured credit costs. This finding suggests that failure to properly account for collateralization may result in significant mispricing of financial contracts. We also analyze the difference between cleared and OTC markets.

scholarly journals An Economic Examination of Collateralization in Different Financial Markets

2019 ◽  
Author(s):  
Tim Xiao
Keyword(s):  
Risk Factors ◽  
Credit Risk ◽  
Financial Markets ◽  
Counterparty Risk ◽  
Financial Contracts ◽  
Theoretical Justification ◽  
Data Set ◽  
Unique Data ◽  
Economic Significance ◽  
The Difference

This paper attempts to assess the economic significance and implications of collateralization in different financial markets, which is essentially a matter of theoretical justification and empirical verification. We present a comprehensive theoretical framework that allows for collateralization adhering to bankruptcy laws. As such, the model can back out differences in asset prices due to collateralized counterparty risk. This framework is very useful for pricing outstanding defaultable financial contracts. By using a unique data set, we are able to achieve a clean decomposition of prices into their credit risk factors. We find empirical evidence that counterparty risk is not overly important in credit-related spreads. Only the joint effects of collateralization and credit risk can sufficiently explain unsecured credit costs. This finding suggests that failure to properly account for collateralization may result in significant mispricing of financial contracts. We also analyze the difference between cleared and OTC markets.

scholarly journals Pricing Financial Derivatives Subject to Multilateral Credit Risk and Collateralization

2019 ◽  
Author(s):  
Tim Xiao
Keyword(s):  
Asset Pricing ◽  
Credit Risk ◽  
Financial Markets ◽  
Default Risk ◽  
Credit Default Swap ◽  
Financial Derivatives ◽  
Counterparty Risk ◽  
Financial Contracts ◽  
Credit Default ◽  
Default Swap

This article presents a new model for valuing financial contracts subject to credit risk and collateralization. Examples include the valuation of a credit default swap (CDS) contract that is affected by the trilateral credit risk of the buyer, seller and reference entity. We show that default dependency has a significant impact on asset pricing. In fact, correlated default risk is one of the most pervasive threats in financial markets. We also show that a fully collateralized CDS is not equivalent to a risk-free one. In other words, full collateralization cannot eliminate counterparty risk completely in the CDS market.

scholarly journals Pricing Financial Derivatives Subject to Multilateral Credit Risk and Collateralization

2019 ◽  
Author(s):  
Tim Xiao
Keyword(s):  
Asset Pricing ◽  
Credit Risk ◽  
Financial Markets ◽  
Default Risk ◽  
Credit Default Swap ◽  
Financial Derivatives ◽  
Counterparty Risk ◽  
Financial Contracts ◽  
Credit Default ◽  
Default Swap

This article presents a new model for valuing financial contracts subject to credit risk and collateralization. Examples include the valuation of a credit default swap (CDS) contract that is affected by the trilateral credit risk of the buyer, seller and reference entity. We show that default dependency has a significant impact on asset pricing. In fact, correlated default risk is one of the most pervasive threats in financial markets. We also show that a fully collateralized CDS is not equivalent to a risk-free one. In other words, full collateralization cannot eliminate counterparty risk completely in the CDS market.

scholarly journals Pricing Financial Derivatives Subject to Multilateral Credit Risk and Collateralization

2019 ◽  
Author(s):  
Tim Xiao
Keyword(s):  
Asset Pricing ◽  
Credit Risk ◽  
Financial Markets ◽  
Default Risk ◽  
Credit Default Swap ◽  
Financial Derivatives ◽  
Counterparty Risk ◽  
Financial Contracts ◽  
Credit Default ◽  
Default Swap

This article presents a new model for valuing financial contracts subject to credit risk and collateralization. Examples include the valuation of a credit default swap (CDS) contract that is affected by the trilateral credit risk of the buyer, seller and reference entity. We show that default dependency has a significant impact on asset pricing. In fact, correlated default risk is one of the most pervasive threats in financial markets. We also show that a fully collateralized CDS is not equivalent to a risk-free one. In other words, full collateralization cannot eliminate counterparty risk completely in the CDS market.

scholarly journals Pricing Financial Derivatives Subject to Multilateral Credit Risk and Collateralization

2019 ◽  
Author(s):  
Tim Xiao
Keyword(s):  
Asset Pricing ◽  
Credit Risk ◽  
Financial Markets ◽  
Default Risk ◽  
Credit Default Swap ◽  
Financial Derivatives ◽  
Counterparty Risk ◽  
Financial Contracts ◽  
Credit Default ◽  
Default Swap

This article presents a new model for valuing financial contracts subject to credit risk and collateralization. Examples include the valuation of a credit default swap (CDS) contract that is affected by the trilateral credit risk of the buyer, seller and reference entity. We show that default dependency has a significant impact on asset pricing. In fact, correlated default risk is one of the most pervasive threats in financial markets. We also show that a fully collateralized CDS is not equivalent to a risk-free one. In other words, full collateralization cannot eliminate counterparty risk completely in the CDS market.

Financial market liquidity, returns and market growth: evidence from Bolsa and Börse, 1902–1925

2010 ◽  
Vol 17 (1) ◽  
pp. 73-98 ◽  
Author(s):  
Lyndon Moore
Keyword(s):  
Financial Markets ◽  
Financial Market ◽  
Growth And Development ◽  
Important Determinant ◽  
Market Liquidity ◽  
Cross Sectional ◽  
Data Set ◽  
Liquidity Shocks ◽  
Market Growth ◽  
Unique Data

The article is based on a unique data set of securities traded on the Madrid Bolsa and the Zurich Börse between 1902 and 1925. We examine the pricing of liquidity and demonstrate that the liquidity level of securities was an important determinant of cross-sectional returns. Factors that are usually found important in contemporary markets, such as securities' sensitivity to market-wide liquidity shocks and market movements, turn out to have been irrelevant in the early twentieth century. In addition, the illiquidity of the Madrid market appears to have modestly slowed capital raising there. Our results suggest that market liquidity was an important determinant of the growth and development of financial markets.

Do central counterparties reduce counterparty and liquidity risk? Empirical results

2021 ◽  
pp. 1-10
Author(s):  
Carlos León ◽  
Ricardo Mariño ◽  
Carlos Cadena
Keyword(s):  
Financial Markets ◽  
Financial Institutions ◽  
Liquidity Risk ◽  
Counterparty Risk ◽  
Financial Contracts ◽  
Empirical Results ◽  
Forward Market ◽  
Central Counterparties ◽  
Clearing And Settlement ◽  
First Time

A central counterparty (CCP) interposes itself between buyers and sellers of financial contracts to extinguish their bilateral exposures. Therefore, central clearing and settlement through a CCP should affect how financial institutions engage in financial markets. Though, financial institutions’ interactions are difficult to observe and analyze. Based on a unique transactional dataset corresponding to the Colombian peso non-delivery forward market, this article compares—for the first time—networks of transactions agreed to be cleared and settled by the CCP with those to be cleared and settled bilaterally. Networks to be centrally cleared and settled show significantly higher connectivity and lower distances among financial institutions. This suggests that agreeing on central clearing and settlement reduces liquidity risk. After CCP interposition, exposure networks show significantly lower connectivity and higher distances, consistent with a reduction of counterparty risk. Consequently, evidence shows CCPs induce a change of behavior in financial institutions that emerges as two distinctive economic structures for the same market, which corresponds to CCP’s intended reduction of liquidity and counterparty risks.

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