EconPapers    
Economics at your fingertips  
 

Systemic Risk: The Dynamics under Central Clearing

Agostino Capponi (), W. Allen Cheng () and Sriram Rajan ()
Additional contact information
Agostino Capponi: Columbia University
W. Allen Cheng: Johns Hopkins University
Sriram Rajan: Office of Financial Research

No 15-08, Working Papers from Office of Financial Research, US Department of the Treasury

Abstract: We develop a tractable model to resemble asset value processes of financial institutions trading with the central clearinghouse for risk mitigating purposes. Each institution allocates assets between its loan book and the account used to trade with the central clearinghouse. We show that a unique equilibrium allocation profile arises when institutions adjust trading positions to perfectly hedge risk stemming from their loan books. We then analyze the dynamic equilibrium path. As a regulatory monitoring tool, our model shows a buildup of systemic risk, manifested through the increase of market concentration, whose negative size externalities can be internalized via a self-funding systemic risk charge mechanism. We provide new testable predictions, including that (i) the volatility of the traded portfolio of a member can be forecasted by the collective capital committed by all others, (ii) hedging becomes increasingly costly for an institution as its asset value increases, (iii) market shocks have smaller impact on allocation decisions than operational shocks.

Keywords: Central Clearing; Central Counterparties; Systemic Risk; Self-Funding Systemic Risk Charge; Concentration Risks (search for similar items in EconPapers)
Date: 2015-05-07
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
https://financialresearch.gov/working-papers/files ... Central-Clearing.pdf First version, 2015 (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:ofr:wpaper:15-08

Access Statistics for this paper

More papers in Working Papers from Office of Financial Research, US Department of the Treasury Contact information at EDIRC.
Bibliographic data for series maintained by Gregory Feldberg ().

 
Page updated 2019-04-14
Handle: RePEc:ofr:wpaper:15-08