Contagion in Derivatives Markets

H Peyton Young, Mark Paddrik and Sriram Rajan

No 839, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: Abstract A major credit shock can induce large intra-day variation margin payments between counterparties in derivatives markets, which may force some participants to default on their payments. These payment shortfalls become amplified as they cascade through the network of exposures. Using detailed DTCC data we model the full network of exposures, the shock-induced payments, the initial margin collected, and liquidity buffers for about 900 firms operating in the U.S. credit default swaps market. We estimate the total amount of contagion, the marginal contribution of each firm to contagion, and the number of defaulting firms for credit shocks of different magnitudes. A novel feature of the model is that it allows for a range of possible responses to balance sheet stress, including delayed or partial payments. These `soft default' options distinguish our approach from conventional network models, which typically assume that full default is triggered whenever the default boundary is breached. Revised January 2018

Keywords: Financial networks; contagion; stress testing; credit default swaps (search for similar items in EconPapers)
JEL-codes: D85 G23 L1 (search for similar items in EconPapers)
Date: 2017-11-21
New Economics Papers: this item is included in nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

Downloads: (external link)
https://ora.ox.ac.uk/objects/uuid:c966a71b-1c61-4c4e-8a5e-48a871aed699 (text/html)

Related works:
Journal Article: Contagion in Derivatives Markets (2020)
Working Paper: Contagion in Derivatives Markets (2019)
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:oxf:wpaper:839

Access Statistics for this paper

More papers in Economics Series Working Papers from University of Oxford, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Anne Pouliquen ( this e-mail address is bad, please contact ).