A New Model for Pricing Collateralized Financial Derivatives

Tim Xiao

Post-Print from HAL

Abstract: This paper presents a new model for pricing financial derivatives subject to collateralization. It allows for collateral arrangements adhering to bankruptcy laws. As such, the model can back out the market price of a collateralized contract. This framework is very useful for valuing outstanding derivatives. Using a unique dataset, we find empirical evidence that credit risk alone is not overly important in determining credit-related spreads. Only accounting for both collateral posting and credit risk can sufficiently explain unsecured credit costs. This finding suggests that failure to properly account for collateralization may result in significant mispricing of derivatives. We also empirically gauge the impact of collateral agreements on risk measurements. Our findings indicate that there are important interactions between market and credit risk.

Keywords: collateralization; asset pricing; plumbing of financial system; swap premium spread; CVA (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-rmg
Note: View the original document on HAL open archive server: https://hal.science/hal-01800559v1
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Published in Journal of Derivatives, 2017

Downloads: (external link)
https://hal.science/hal-01800559v1/document (application/pdf)

Related works:
Working Paper: A New Model for Pricing Collateralized Financial Derivatives (2018)
Working Paper: A New Model for Pricing Collateralized Financial Derivatives (2017)
Working Paper: A New Model for Pricing Collateralized Financial Derivatives (2017)
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:hal:journl:hal-01800559

Access Statistics for this paper

More papers in Post-Print from HAL
Bibliographic data for series maintained by CCSD ().