Risk-Cost Frontier and Collateral Valuation in Securities Settlement Systems for Extreme Market Events

Alejandro Garcia and Ramazan Gencay

Staff Working Papers from Bank of Canada

Abstract: The authors examine how the use of extreme value theory yields collateral requirements that are robust to extreme fluctuations in the market price of the asset used as collateral. In particular, they study the risk and cost attributes of market risk measures by constructing a risk-cost frontier for the collateral pledged to cover exposures in a securities settlement system. The frontier can be used as a diagnostic tool to understand the risk-cost trade-off of different methodologies to calculate collateral value (haircuts) and select the most efficient alternative in a variety of settings.

Keywords: Financial stability; Payment clearing and settlement systems; Econometric and statistical methods (search for similar items in EconPapers)
JEL-codes: C1 G0 G1 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2006
New Economics Papers: this item is included in nep-fin and nep-fmk
References: View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:06-17

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