EconPapers    
Economics at your fingertips  
 

Resolving a Clearing Member's Default, A Radner Equilibrium Approach

Dorinel Bastide, St\'ephane Cr\'epey, Samuel Drapeau and Mekonnen Tadese
Additional contact information
Dorinel Bastide: LaMME
St\'ephane Cr\'epey: LPSM
Samuel Drapeau: LPSM
Mekonnen Tadese: LPSM

Papers from arXiv.org

Abstract: For vanilla derivatives that constitute the bulk of investment banks' hedging portfolios, central clearing through central counterparties (CCPs) has become hegemonic. A key mandate of a CCP is to provide an efficient and proper clearing member default resolution procedure. When a clearing member defaults, the CCP can hedge and auction or liquidate its positions. The counterparty credit risk cost of auctioning has been analyzed in terms of XVA metrics in Bastide, Cr{\'e}pey, Drapeau, and Tadese (2023). In this work we assess the costs of hedging or liquidating. This is done by comparing pre- and post-default market equilibria, using a Radner equilibrium approach for portfolio allocation and price discovery in each case. We show that the Radner equilibria uniquely exist and we provide both analytical and numerical solutions for the latter in elliptically distributed markets. Using such tools, a CCP could decide rationally on which market to hedge and auction or liquidate defaulted portfolios.

Date: 2023-10, Revised 2024-10
New Economics Papers: this item is included in nep-ban and nep-rmg
References: Add references at CitEc
Citations:

Downloads: (external link)
http://arxiv.org/pdf/2310.02608 Latest version (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:arx:papers:2310.02608

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().

 
Page updated 2024-12-28
Handle: RePEc:arx:papers:2310.02608