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Centralized clearing for over-the-counter derivatives

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Author Info

  • Rausser, Gordon C.

    ()
    (University of California, Berkeley. Dept of agricultural and resource economics)

  • Balson, William

    (RBS Aquisition Company, LLC)

  • Stevens, Reid

    ()
    (University of California, Berkeley)

Abstract

Systemic risk propagated through over-the-counter derivatives can best be managed by a public-private central counterparty clearing house (CCP). Though private CCPs provide an adequate amount of clearing's private good, they do not provide the socially optimal level of the public good or impure goods. By undersupplying both public and impure goods, private CCPs may exacerbate the conditions under which financial crises develop and propagate. A public-private partnership could align incentives so that the CCP produces the socially optimal level of the private, public, and impure goods. A partnership using a two-part pricing scheme for OTC structured composite transactions could properly compensate both partners and provide an effective policy instrument for controlling systemic risk. Moreover this structure, in contrast to current proposed government regulations, will not drive out the "good" with the "bad" OTC derivative instruments.

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Bibliographic Info

Paper provided by University of California at Berkeley, Department of Agricultural and Resource Economics and Policy in its series CUDARE Working Paper Series with number 1091.

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Length: 52 pages
Date of creation: Sep 2009
Date of revision:
Handle: RePEc:are:cudare:1091

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Related research

Keywords: risk; econometrics; econometric models; risk; econometrics; econometric models;

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References

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  1. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  2. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
  3. Hart, Oliver & Moore, John, 1999. "Foundations of Incomplete Contracts," Review of Economic Studies, Wiley Blackwell, vol. 66(1), pages 115-38, January.
  4. Pratt, John W & Zeckhauser, Richard J, 1989. " The Impact of Risk Sharing on Efficient Decision," Journal of Risk and Uncertainty, Springer, vol. 2(3), pages 219-34, September.
  5. Mario J. Miranda & Paul L. Fackler, 2004. "Applied Computational Economics and Finance," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262633094, December.
  6. Marco Francesconi & Abhinay Muthoo, 2006. "Control Rights in Public-Private Partnership," Economics Discussion Papers 612, University of Essex, Department of Economics.
  7. Timothy Besley & Maitreesh Ghatak, 2001. "Government Versus Private Ownership Of Public Goods," The Quarterly Journal of Economics, MIT Press, vol. 116(4), pages 1343-1372, November.
  8. Oliver Hart & John Moore, 1985. "Incomplete Contracts and Renegotiation," Working papers 367, Massachusetts Institute of Technology (MIT), Department of Economics.
  9. Williams, Jeffrey C., 2001. "Commodity futures and options," Handbook of Agricultural Economics, in: B. L. Gardner & G. C. Rausser (ed.), Handbook of Agricultural Economics, edition 1, volume 1, chapter 13, pages 745-816 Elsevier.
  10. Gregory, Allan W. & Reeves, Jonathan J., 2008. "Interpreting Value at Risk (VaR) forecasts," Economic Systems, Elsevier, vol. 32(2), pages 167-176, June.
  11. Arnold M. Faden & Gordon C. Rausser, 1976. "Econometric Policy Model Construction: The Post-Bayesian Approach," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 5, number 3, pages 349-363 National Bureau of Economic Research, Inc.
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Cited by:
  1. Karel Janda & Gordon Rausser, 2011. "Comparing American and European Regulation of Over-the- Counter Derivative Securities," European Financial and Accounting Journal, University of Economics, Prague, vol. 2011(4), pages 7-19.
  2. Jean-Sébastien Fontaine & Héctor Pérez Saiz & Joshua Slive, 2012. "When Lower Risk Increases Profit: Competition and Control of a Central Counterparty," Working Papers 12-35, Bank of Canada.

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