Post by Sapphire Capital on Jul 11, 2008 21:41:59 GMT 4
Credit Derivatives, Capital Requirements and Opaque OTC Markets
ANTONIO NICOLO
University of Padua - Department of Economics
LORIANA PELIZZON
University of Venice - Department of Economics
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March 4, 2008
Abstract:
In this paper we study the optimal design of credit derivative contracts when banks have private information about their ability in the loan market and are subject to capital requirements. First, we prove that when banks are subject to a maximum loss capital requirement the optimal signalling contract is a binary credit default basket. Second, we show that if credit derivative markets are opaque then banks cannot commit to terminal-date risk exposure, and therefore the optimal signalling contract is more costly. The above results allow us to discuss the potential implications of different capital adequacy rules for the credit derivative markets.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1108253_code264068.pdf?abstractid=1108253&mirid=3
ANTONIO NICOLO
University of Padua - Department of Economics
LORIANA PELIZZON
University of Venice - Department of Economics
--------------------------------------------------------------------------------
March 4, 2008
Abstract:
In this paper we study the optimal design of credit derivative contracts when banks have private information about their ability in the loan market and are subject to capital requirements. First, we prove that when banks are subject to a maximum loss capital requirement the optimal signalling contract is a binary credit default basket. Second, we show that if credit derivative markets are opaque then banks cannot commit to terminal-date risk exposure, and therefore the optimal signalling contract is more costly. The above results allow us to discuss the potential implications of different capital adequacy rules for the credit derivative markets.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1108253_code264068.pdf?abstractid=1108253&mirid=3