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Risk-Cost Frontier and Collateral Valuation in Securities Settlement Systems for Extreme Market Events

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Author Info

  • Alejandro García
  • Ramazan Gençay

Abstract

The authors examine how the use of extreme value theory yields collateral requirements that are robust to extreme fluctuations in the market price of the asset used as collateral. In particular, they study the risk and cost attributes of market risk measures by constructing a risk-cost frontier for the collateral pledged to cover exposures in a securities settlement system. The frontier can be used as a diagnostic tool to understand the risk-cost trade-off of different methodologies to calculate collateral value (haircuts) and select the most efficient alternative in a variety of settings.

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File URL: http://www.bankofcanada.ca/wp-content/uploads/2010/02/wp06-17.pdf
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Bibliographic Info

Paper provided by Bank of Canada in its series Working Papers with number 06-17.

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Length: 48 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:bca:bocawp:06-17

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Related research

Keywords: Financial stability; Payment; clearing; and settlement systems; Econometric and statistical methods;

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Cited by:
  1. Douglas D. Evanoff & Daniela Russo & Robert Steigerwald, 2006. "Policymakers, researchers, and practitioners discuss the role of central counterparties," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q IV, pages 2-21.

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