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How safe are central counterparties in credit default swap markets?

Paddrick, Mark and Young, H. Peyton (2020) How safe are central counterparties in credit default swap markets? Mathematics and Financial Economics. ISSN 1862-9679

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Identification Number: 10.1007/s11579-019-00243-z

Abstract

We propose a general framework for estimating the vulnerability to default by a central counterparty (CCP) in the credit default swaps market. Unlike conventional stress testing approaches, which estimate the ability of a CCP to withstand nonpayment by its two largest counterparties, we study the direct and indirect effects of nonpayment by members and/or their clients through the full network of exposures. We illustrate the approach for the U.S. credit default swaps market under shocks that are similar in magnitude to the Federal Reserve’s stress tests. The analysis indicates that conventional stress testing approaches may underestimate the potential vulnerability of the main CCP for this market.

Item Type: Article
Official URL: https://link.springer.com/journal/11579
Additional Information: © 2019 Springer-Verlag GmbH Germany, part of Springer Nature
Divisions: Mathematics
Subjects: H Social Sciences > HG Finance
H Social Sciences > HB Economic Theory
JEL classification: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D85 - Network Formation and Analysis: Theory
L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L14 - Transactional Relationships; Contracts and Reputation; Networks
Date Deposited: 15 Jul 2019 15:42
Last Modified: 29 Jul 2020 08:57
URI: http://eprints.lse.ac.uk/id/eprint/101170

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