Rosenthal, Dale W.R. (2009): Market structure, counterparty risk, and systemic risk.
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Networks modeling bilaterally-cleared and centrally-cleared derivatives markets are shown to yield economically different price impact, volatility and contagion after an initial bankruptcy. A large bankruptcy in bilateral markets may leave a counterparty unable to expectationally prevent bankruptcy (checkmate) or make counterparties push markets and profit from contagion (hunting). In distress, bilateral markets amplify systemic risk and volatility versus centralized markets and are more subject to crises with real effects: contagion, unemployment, reduced tax revenue, higher transactions costs, lower risk sharing, and reduced allocative efficiency. Pricing distress volatility may suggest when to transition to central clearing. The model suggests three metrics for the well-connected part of a market -- number of counterparties, average risk aversion, and standard deviation of total exposure -- may characterize its fragility.
|Item Type:||MPRA Paper|
|Original Title:||Market structure, counterparty risk, and systemic risk|
|Keywords:||network model; systemic risk; contagion; predatory trading|
|Subjects:||G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation
G - Financial Economics > G0 - General > G01 - Financial Crises
D - Microeconomics > D4 - Market Structure, Pricing, and Design > D49 - Other
|Depositing User:||Dale W.R. Rosenthal|
|Date Deposited:||20. Feb 2012 13:44|
|Last Modified:||14. Sep 2015 06:05|
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