Managing Adverse Dependence for Portfolios of Collateral in Financial Infrastructures

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Managing Adverse Dependence for Portfolios of Collateral in Financial Infrastructures

Author Info

Alejandro García
Ramazan Gençay

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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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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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Find related papers by JEL classification:
G00 - Financial Economics - - General - - - General
G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - General

This paper has been announced in the following NEP Reports:

NEP-ALL-2007-04-09 (All new papers)
NEP-CFN-2007-04-09 (Corporate Finance)
NEP-RMG-2007-04-09 (Risk Management)

References listed on IDEAS
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Nicholas Chan & Mila Getmansky & Shane M. Haas & Andrew W. Lo, 2005. "Systemic Risk and Hedge Funds," NBER Working Papers 11200, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Other versions:
- 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. [Downloadable!]

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