Markets Evolution After the Credit Crunch

Bianchetti, Marco and Carlicchi, Mattia (2012): Markets Evolution After the Credit Crunch.

Abstract

We review the main changes in the interbank market after the financial crisis started in August 2007. In particular, we focus on the fixed income market and we analyse the most relevant empirical evidences regarding the divergence of the existing basis between interbank rates with different tenor, such as Libor and OIS. We also discuss a qualitative explanation of these effects based on the consideration of credit and liquidity variables. Then, we focus our attention on the diffusion of collateral agreements among OTC derivatives market counterparties, and on the consequent change of paradigm for pricing derivatives. We illustrate the main qualitative features of the new market practice, called CSA discounting, and we point out the most relevant issues for market players associated to its adoption.

• Item Type: MPRA Paper
• Language: English
• Keywords: crisis, liquidity, credit, counterparty, risk, fixed income, Libor, Euribor, Eonia, OIS – Libor basis, yield curve, forward curve, discount curve, single curve, multiple curve, collateral, CSA discounting, no arbitrage, pricing, interest rate derivatives, FRA, swap, OIS, basis swap, forward rate, CDS spread, ECB monetary policy, ISDA
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Interest Rates: Determination, Term Structure, and Effects; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing ; Futures Pricing

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