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Assessing financial distress dependencies in OTC markets: a new approach by Trade Repositories data

Michele Bonollo (), Irene Crimaldi (), Andrea Flori (), Laura Gianfagna and Fabio Pammolli ()
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Michele Bonollo: Iason Ltd and IMT School for Advanced Studies Lucca
Irene Crimaldi: IMT School for Advanced Studies Lucca
Andrea Flori: IMT School for Advanced Studies Lucca

No 10/2015, Working Papers from IMT School for Advanced Studies Lucca

Abstract: After the recent financial crisis, it is undoubtedly recognized the importance of assessing not only the risk of distress for a single \financial entity", but also the distress dependencies between the different \entities", where by \entities" we mean in a broad sense any relevant cluster of products, risk factors, counterparties. In this paper, we focus on the Interest Rate Swap (IRS) segment as a significant fraction of the OTC market. We define a distress indicator by combining some distress drivers, such as averaged volumes, liquidity, volatility and bid-ask proxies. Hence, we analyse the distress dependencies among sub-markets identified by the segmentation of the IRS market according to contractual and financial features. We try to combine in an innovative way some new ingredients, namely the more granular data on OTC derivatives available from the trade repositories along with the classical JPoD approach introduced in the recent years by the IMF for studying the distress interdependence structure among financial institutions. The proposed technique seems to be quite promising. Indeed, the results are quite close to the practical intuition. At the best of our knowledge, this work is the first empirical study based on trade repositories' data for assessing systemic risk.

Keywords: Financial distress interdependence; Joint probability of distress; Interest rate swap; Systemic risk; Trade repositories (search for similar items in EconPapers)
JEL-codes: G01 G18 G19 (search for similar items in EconPapers)
Pages: 22
Date: 2015-10, Revised 2015-10
New Economics Papers: this item is included in nep-mst and nep-rmg
References: View references in EconPapers View complete reference list from CitEc

Published in EIC working paper series

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