EconPapers    
Economics at your fingertips  
 

Endogenous Derivative Networks

G. Vuillemey and Régis Breton ()

Working papers from Banque de France

Abstract: This paper proposes a network formation model of an OTC derivatives market where both prices and quantities are bilaterally negociated. The key feature of the framework is to endogenize the network of exposures, the gross and net notional amounts traded and the collateral delivered through initial and variation margins, as a function of idiosyncratic counterparty risk and regulatory collateral and clearing requirements. Using the framework, we investigate numerically the size of the derivatives network, the aggregate collateral demand and the pricing of the contracts under the following schemes: (i) various levels of collateralization for uncleared transactions, (ii) rehypothecation of received collateral and (iii) clearing through a central clearing party (CCP). Overall results suggest that dynamic effects due to the endogeneity of the derivative network to the collateralization and clearing requirements have sizeable consequences on both contract volumes and prices. Intermediary trading and market liquidity are reduced by higher collateralization requirements and enhanced by rehypothecation, while the potential for contagion is reduced. Not accounting for dynamic effects in current market conditions may lead to over-estimate collateral demand induced by mandatory central clearing by up to 22%.

Keywords: Collateral; Credit derivatives; Central Clearing Party (CCP); Rehypothecation; Network formation. (search for similar items in EconPapers)
JEL-codes: G11 G17 G28 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2014
New Economics Papers: this item is included in nep-ban and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Downloads: (external link)
https://publications.banque-france.fr/sites/defaul ... g-paper_483_2014.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:483

Access Statistics for this paper

More papers in Working papers from Banque de France Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS. Contact information at EDIRC.
Bibliographic data for series maintained by Michael brassart ().

 
Page updated 2025-03-30
Handle: RePEc:bfr:banfra:483