Post by Sapphire Capital on Aug 5, 2008 21:54:03 GMT 4
The Price of Protection: Derivatives, Default Risk, and Margining
Rajna Gibson
University of Zurich - Swiss Banking Institute (ISB)
Carsten Murawski
University of Melbourne - Department of Finance
February 2008
20th Australasian Finance & Banking Conference 2007 Paper
Abstract:
By attaching collateral to a derivatives contract, margining supposedly reduces default risk. In this paper, we first develop a set of testable hypotheses about the effects of margining on banks' welfare, trading volume, and default risk in the context of a stylized banking sector equilibrium model. Subsequently, we test these hypotheses with a market simulation model. Capturing some of the main characteristics of derivatives markets, we identify situations where margining may increase banks' default risk while reducing their welfare and their aggregate trading volume. This is the case, in particular, when margin rates are high and collateral is scarce.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1092685_code334212.pdf?abstractid=1009527&mirid=3
Rajna Gibson
University of Zurich - Swiss Banking Institute (ISB)
Carsten Murawski
University of Melbourne - Department of Finance
February 2008
20th Australasian Finance & Banking Conference 2007 Paper
Abstract:
By attaching collateral to a derivatives contract, margining supposedly reduces default risk. In this paper, we first develop a set of testable hypotheses about the effects of margining on banks' welfare, trading volume, and default risk in the context of a stylized banking sector equilibrium model. Subsequently, we test these hypotheses with a market simulation model. Capturing some of the main characteristics of derivatives markets, we identify situations where margining may increase banks' default risk while reducing their welfare and their aggregate trading volume. This is the case, in particular, when margin rates are high and collateral is scarce.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1092685_code334212.pdf?abstractid=1009527&mirid=3