Risk Reallocation in OTC Derivatives Networks

Emil Siriwardane, Bernard Herskovic and Andrea Eisfeldt
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Emil Siriwardane: Harvard Business School

No 538, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: Over-the-counter (OTC) derivatives markets are the key venue for quickly reallocating exposures to key risk factors such as interest rates, exchange rates, and credit amongst market participants. These markets are very large, and are characterized by a complex trading network with disperse prices. In this paper, we ask how the structure of the OTC derivatives trading network, the preferences and technologies of the participants, and the distribution of endowed exposures to the underlying risk factor, jointly determine the observed patterns of trade, post-trade exposures, and prices. We use detailed data from the DTCC to estimate the key parameters of our model. Finally, we use the model at estimated parameters to study comparative statics related to risk management and regulation.

Date: 2016
New Economics Papers: this item is included in nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed016:538

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