A New Model for Pricing Collateralized OTC Derivatives

This paper presents a new model for pricing OTC derivatives subject to collateralization. It allows for collateral posting adhering to bankruptcy laws. As such, the model can back out the market price of a collateralized contract. This framework is very useful for valuing outstanding derivatives. Using a unique dataset, we find empirical evidence that credit risk alone is not overly important in determining credit-related spreads. Only accounting for both collateral arrangement and credit risk can sufficiently explain unsecured credit costs. This finding suggests that failure to properly account for collateralization may result in significant mispricing of derivatives. We also empirically gauge the impact of collateral agreements on risk measurements. Our findings indicate that there are important interactions between market and credit risk. https://arabixiv.org/b9vg8/download

A New Model for Pricing Collateralized OTC Derivatives

10.31226/osf.io/am8zy ◽

2019 ◽

Author(s):

Tim Xiao

Keyword(s):

Credit Risk ◽

Empirical Evidence ◽

Market Price ◽

New Model ◽

Otc Derivatives ◽

Risk Measurements ◽

The Impact ◽

ABSTRACTThis paper presents a new model for pricing OTC derivatives subject to collateralization. It allows for collateral posting adhering to bankruptcy laws. As such, the model can back out the market price of a collateralized contract. This framework is very useful for valuing outstanding derivatives. Using a unique dataset, we find empirical evidence that credit risk alone is not overly important in determining credit-related spreads. Only accounting for both collateral arrangement and credit risk can sufficiently explain unsecured credit costs. This finding suggests that failure to properly account for collateralization may result in significant mispricing of derivatives. We also empirically gauge the impact of collateral agreements on risk measurements. Our findings indicate that there are important interactions between market and credit risk. https://frenxiv.org/am8zy/download

A New Model for Pricing Collateralized OTC Derivatives

10.31222/osf.io/7cj3s ◽

2019 ◽

Author(s):

Tim Xiao

Keyword(s):

Credit Risk ◽

Empirical Evidence ◽

Market Price ◽

New Model ◽

Otc Derivatives ◽

Risk Measurements ◽

The Impact ◽

This paper presents a new model for pricing OTC derivatives subject to collateralization. It allows for collateral posting adhering to bankruptcy laws. As such, the model can back out the market price of a collateralized contract. This framework is very useful for valuing outstanding derivatives. Using a unique dataset, we find empirical evidence that credit risk alone is not overly important in determining credit-related spreads. Only accounting for both collateral arrangement and credit risk can sufficiently explain unsecured credit costs. This finding suggests that failure to properly account for collateralization may result in significant mispricing of derivatives. We also empirically gauge the impact of collateral agreements on risk measurements. Our findings indicate that there are important interactions between market and credit risk.

A New Model for Pricing Collateralized OTC Derivatives

10.31229/osf.io/y2wqc ◽

2019 ◽

Author(s):

Tim Xiao

Keyword(s):

Credit Risk ◽

Empirical Evidence ◽

Market Price ◽

New Model ◽

Otc Derivatives ◽

Risk Measurements ◽

The Impact ◽

This paper presents a new model for pricing OTC derivatives subject to collateralization. It allows for collateral posting adhering to bankruptcy laws. As such, the model can back out the market price of a collateralized contract. This framework is very useful for valuing outstanding derivatives. Using a unique dataset, we find empirical evidence that credit risk alone is not overly important in determining credit-related spreads. Only accounting for both collateral arrangement and credit risk can sufficiently explain unsecured credit costs. This finding suggests that failure to properly account for collateralization may result in significant mispricing of derivatives. We also empirically gauge the impact of collateral agreements on risk measurements. Our findings indicate that there are important interactions between market and credit risk. https://osf.io/preprints/lissa/y2wqc/download

A New Model for Pricing Collateralized OTC Derivatives

10.31227/osf.io/dwz2m ◽

2019 ◽

Author(s):

Tim Xiao

Keyword(s):

Credit Risk ◽

Empirical Evidence ◽

Market Price ◽

New Model ◽

Otc Derivatives ◽

Risk Measurements ◽

The Impact ◽

This paper presents a new model for pricing OTC derivatives subject to collateralization. It allows for collateral posting adhering to bankruptcy laws. As such, the model can back out the market price of a collateralized contract. This framework is very useful for valuing outstanding derivatives. Using a unique dataset, we find empirical evidence that credit risk alone is not overly important in determining credit-related spreads. Only accounting for both collateral arrangement and credit risk can sufficiently explain unsecured credit costs. This finding suggests that failure to properly account for collateralization may result in significant mispricing of derivatives. We also empirically gauge the impact of collateral agreements on risk measurements. Our findings indicate that there are important interactions between market and credit risk.

A New Model for Pricing Collateralized Financial Derivatives

10.31235/osf.io/fvdzh ◽

2018 ◽

Author(s):

Tim Xiao

Keyword(s):

Credit Risk ◽

Empirical Evidence ◽

Empirical Data ◽

Market Price ◽

Financial Derivatives ◽

New Model ◽

Risk Measurements ◽

The Impact ◽

This paper presents a new model for pricing financial derivatives subject to collateralization. It allows for collateral arrangements adhering to bankruptcy laws. As such, the model can back out the market price of a collateralized contract. This framework is very useful for valuing outstanding derivatives. Using a unique dataset, we find empirical evidence that credit risk alone is not overly important in determining credit-related spreads. Only accounting for both collateral posting and credit risk can sufficiently explain unsecured credit costs. This finding suggests that failure to properly account for collateralization may result in significant mispricing of derivatives. We also empirically gauge the impact of collateral agreements on risk measurements. Our findings indicate that there are important interactions between market and credit risk. Acknowledge: The empirical data were provided by FinPricing at http://www.finpricing.com/lib/IrSwap.html https://osf.io/preprints/socarxiv/fvdzh/download

The Impact of Margin Trading and Short Selling by Retail Investors on Market Price Efficiency: Empirical Evidence from Bitcoin Exchanges

Finance Research Letters ◽

10.1016/j.frl.2022.102689 ◽

2022 ◽

pp. 102689

Author(s):

Jan-Oliver Strych

Keyword(s):

Empirical Evidence ◽

Market Price ◽

Short Selling ◽

Price Efficiency ◽

Retail Investors ◽

The Impact of Default Dependency and Collateralization on Asset Pricing and Credit Risk Modeling

10.31221/osf.io/96dy5 ◽

2019 ◽

Author(s):

Tim Xiao

Keyword(s):

Asset Pricing ◽

Credit Risk ◽

Financial Markets ◽

Default Risk ◽

Risk Modeling ◽

Financial Instruments ◽

Otc Derivatives ◽

Counterparty Credit Risk ◽

Comprehensive Framework ◽

This article presents a comprehensive framework for valuing financial instruments subject to credit risk. In particular, we focus on the impact of default dependence on asset pricing, as correlated default risk is one of the most pervasive threats in financial markets. We analyze how swap rates are affected by bilateral counterparty credit risk, and how CDS spreads depend on the trilateral credit risk of the buyer, seller, and reference entity in a contract. Moreover, we study the effect of collateralization on valuation, since the majority of OTC derivatives are collateralized. The model shows that a fully collateralized swap is risk-free, whereas a fully collateralized CDS is not equivalent to a risk-free one.

The Impact of Margin Trading and Short Selling by Retail Investors on Market Price Efficiency: Empirical Evidence from Bitcoin Exchanges

SSRN Electronic Journal ◽

10.2139/ssrn.3704922 ◽

2020 ◽

Author(s):

Jan-Oliver Strych

Keyword(s):

Empirical Evidence ◽

Market Price ◽

Short Selling ◽

Price Efficiency ◽

Retail Investors ◽

The Impact of Default Dependency and Collateralization on Asset Pricing and Credit Risk Modeling

10.20944/preprints201910.0038.v1 ◽

2019 ◽

Author(s):

Tim Xiao

Keyword(s):

Asset Pricing ◽

Credit Risk ◽

Financial Markets ◽

Default Risk ◽

Risk Modeling ◽

Financial Instruments ◽

Otc Derivatives ◽

Counterparty Credit Risk ◽

Comprehensive Framework ◽

This article presents a comprehensive framework for valuing financial instruments subject to credit risk. In particular, we focus on the impact of default dependence on asset pricing, as correlated default risk is one of the most pervasive threats in financial markets. We analyze how swap rates are affected by bilateral counterparty credit risk, and how CDS spreads depend on the trilateral credit risk of the buyer, seller, and reference entity in a contract. Moreover, we study the effect of collateralization on valuation, since the majority of OTC derivatives are collateralized. The model shows that a fully collateralized swap is risk-free, whereas a fully collateralized CDS is not equivalent to a risk-free one.