An Economic Examination of Collateralization in Different Financial Markets

Tim Xiao

Working Papers from HAL

Abstract: This paper attempts to assess the economic significance and implications of collateralization in different financial markets, which is essentially a matter of theoretical justification and empirical verification. We present a comprehensive theoretical framework that allows for collateralization adhering to bankruptcy laws. As such, the model can back out differences in asset prices due to collateralized counterparty risk. This framework is very useful for pricing outstanding defaultable financial contracts. By using a unique data set, we are able to achieve a clean decomposition of prices into their credit risk factors. We find empirical evidence that counterparty risk is not overly important in credit-related spreads. Only the joint effects of collateralization 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 financial contracts. We also analyze the difference between cleared and OTC markets. Acknowledge: The data were provided by FinPricing at www.finpricing.com Key words: unilateral/bilateral collateralization, partial/full/over collateralization, asset pricing, plumbing of the financial system, swap premium spread, OTC/cleared/listed financial markets.

Date: 2019-02-18
New Economics Papers: this item is included in nep-fmk
Note: View the original document on HAL open archive server: https://hal.science/hal-02024144v1
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://hal.science/hal-02024144v1/document (application/pdf)

Related works:
Working Paper: An Economic Examination of Collateralization in Different Financial Markets (2018)
Working Paper: An Economic Examination of Collateralization in Different Financial Markets (2018)
Working Paper: An Economic Examination of Collateralization in Different Financial Markets (2018)
Working Paper: An Economic Examination of Collateralization in Different Financial Markets (2012)
Working Paper: An Economic Examination of Collateralization in Different Financial Markets (2012)
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:wpaper:hal-02024144

Access Statistics for this paper

More papers in Working Papers from HAL
Bibliographic data for series maintained by CCSD ().