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Managing Adverse Dependence for Portfolios of Collateral in Financial Infrastructures

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  • Alejandro García
  • Ramazan Gençay

Abstract

We propose a framework that allows a portfolio manager to quantify the probability of simultaneous losses in multiple assets of a collateral portfolio. Using this framework, we propose a methodology to conduct stress tests on the market value of the portfolio of collateral when undesirable extreme dependence occurs. This framework permits us to quantify the potential impact on the portfolio returns of systemic events that change, or 'break down', the historical comovement structure, imposing an adverse extreme dependence.We illustrate our framework using securities pledged as collateral in the Canadian securities clearing and settlement system.

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Bibliographic Info

Paper provided by Bank of Canada in its series Working Papers with number 07-25.

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Length: 31 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:bca:bocawp:07-25

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Keywords: Econometric and statistical methods; Financial markets; Financial stability;

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  1. Bouye, Eric & Durlleman, Valdo & Nikeghbali, Ashkan & Riboulet, Gaël & Roncalli, Thierry, 2000. "Copulas for finance," MPRA Paper 37359, University Library of Munich, Germany.
  2. Nicholas Chan & Mila Getmansky & Shane M. Haas & Andrew W. Lo, 2007. "Systemic Risk and Hedge Funds," NBER Chapters, in: The Risks of Financial Institutions, pages 235-338 National Bureau of Economic Research, Inc.
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