A Framework for Collateral Risk Control Determination
AbstractThis paper derives a general framework for collateral risk control determination in repurchase transactions or repos. The objective is to treat consistently heterogeneous collateral so that the collateral taker has a similar risk exposure whatever the collateral pledged. The framework measures the level of risk with the probability of incurring a loss higher than a prespeci?ed level given two well-known parameters used to manage the intrinsic risk of collateral: marking to market and haircuts. It allows for the analysis in a self-contained closed form of the way in which different relevant factors interact in the risk control of collateral (e.g.marking to market frequency, level of volatility of interest rates, time to capture and liquidity risk,probability of default of counterparty,etc.). The framework,which combines the recent theoretical literature on credit and interest risk, provides an alternative quanti ?able and objective approach to the existing more ad-hoc rule-based methods used in haircut determination.
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Bibliographic InfoPaper provided by International Center for Financial Asset Management and Engineering in its series FAME Research Paper Series with number rp61.
Date of creation: Dec 2002
Date of revision:
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Collateral; Repurchase Transactions; Default Risk; Central Banks; Monetary Policy Operations;
Find related papers by JEL classification:
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- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
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