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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

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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/en/res/wp/2006/wp06-17.pdf
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Publisher 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
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Handle: RePEc:bca:bocawp:06-17

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

Find related papers by JEL classification:
G0 - Financial Economics - - General
G1 - Financial Economics - - General Financial Markets
C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General

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  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. [Downloadable!]
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