Xiao, Tim (2017): A New Model for Pricing Collateralized Financial Derivatives. Published in: The Journal of Derivatives , Vol. 24, No. 4 (1 July 2017): pp. 820.

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Abstract
This paper presents a new model for pricing financial derivatives subject to collateralization. It allows for collateral arrangements adhering to bankruptcy laws. As such, the model can back out the market price of a collateralized contract. This framework is very useful for valuing outstanding derivatives. Using a unique dataset, we find empirical evidence that credit risk alone is not overly important in determining creditrelated spreads. Only accounting for both collateral posting 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 derivatives. We also empirically gauge the impact of collateral agreements on risk measurements. Our findings indicate that there are important interactions between market and credit risk.
Item Type:  MPRA Paper 

Original Title:  A New Model for Pricing Collateralized Financial Derivatives 
Language:  English 
Keywords:  collateralization, asset pricing, plumbing of financial system, swap premium spread, CVA, VaR, interaction between market and credit risk 
Subjects:  D  Microeconomics > D4  Market Structure, Pricing, and Design > D46  Value Theory D  Microeconomics > D5  General Equilibrium and Disequilibrium > D53  Financial Markets 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 G  Financial Economics > G1  General Financial Markets > G17  Financial Forecasting and Simulation 
Item ID:  87088 
Depositing User:  Tim Xiao 
Date Deposited:  02 Jun 2018 15:12 
Last Modified:  28 Sep 2019 12:31 
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URI:  https://mpra.ub.unimuenchen.de/id/eprint/87088 