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SUMMARY:Managing Counterparty Risk in OTC Markets
DTSTART:20170405T110000
DTEND:20170405T120000
DTSTAMP:20260513T004604Z
UID:9ae114be44efaaa5a4b9b0cf9a8732dfd10438ed3b6e185bc5a8c416
CATEGORIES:Conferences - Seminars
DESCRIPTION:Christoph FREI (University of Alberta)\nWe study how counterpa
 rty risk a affects trading decisions in over-the-counter (OTC) markets. Ba
 nks first manage their default risk\, and then decide on credit default sw
 ap (CDS) trading volumes to hedge against an aggregate risk factor. Becaus
 e counterparty risk introduces an asymmetry between protection buyers and 
 sellers\, our model predicts that perfect risk sharing is only done betwee
 n safe banks\, while riskier banks still maintain diverse post-trade expos
 ures. We show that the costly actions exerted by banks to reduce their def
 ault risk are not socially optimal. Surprisingly\, we find that banks may 
 choose to reduce their default probabilities below the socially optimal le
 vel\, depending on the imposed trade size limits and costs of risk managem
 ent. The model produces new empirical predictions including (i) intermedia
 tion is done by relatively safe banks with medium initial exposure\, (ii) 
 banks with high initial exposures are net buyers of CDSs\, and banks with 
 low initial exposures are the main net sellers but only if they have suffi
 ciently low default risk\, (iii) heterogeneity in post-trade exposures is 
 higher for riskier and smaller for safer banks. These predictions are born
 e out by bilateral exposures data from the CDS market.
LOCATION:UNIL\, Extranef\, room 126 https://planete.unil.ch/plan/?local=EX
 T-126
STATUS:CONFIRMED
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