The impact of a dealer's failure on OTC derivatives market liquidity during volatile periods
AbstractThis paper develops a model in which information losses may be an important part of the cost of an OTC derivatives dealer's failure. A dealer failure forces solvent counterparties of a failed dealer to seek replacement hedges with other dealers. However, by forcing good firms into the derivatives market, the failure provides camouflage for insolvent firms seeking to speculate with a dealer that does not know their credit status. The paper models this information loss and uses the model to quantitatively evaluate a range of scenarios. The results suggest that a market breakdown is unlikely but not quite impossible.
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Bibliographic InfoPaper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 96-6.
Date of creation: 1996
Date of revision:
Other versions of this item:
- Larry D. Wall & Ellis W. Tallman & Peter A. Abken, 1997. "The impact of a dealer's failure on OTC derivatives market liquidity during volatile periods," Proceedings 555, Federal Reserve Bank of Chicago.
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