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Privacy-Preserving Methods for Sharing Financial Risk Exposures

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  • Emmanuel A. Abbe
  • Amir E. Khandani
  • Andrew W. Lo

Abstract

The financial industry relies on trade secrecy to protect its business processes and methods, which can obscure critical financial risk exposures from regulators and the public. Using results from cryptography, we develop computationally tractable protocols for sharing and aggregating such risk exposures that protect the privacy of all parties involved, without the need for trusted third parties. Financial institutions can share aggregate statistics such as Herfindahl indexes, variances, and correlations without revealing proprietary data. Potential applications include: privacy-preserving real-time indexes of bank capital and leverage ratios; monitoring delegated portfolio investments; financial audits; and public indexes of proprietary trading strategies.

Suggested Citation

  • Emmanuel A. Abbe & Amir E. Khandani & Andrew W. Lo, 2012. "Privacy-Preserving Methods for Sharing Financial Risk Exposures," American Economic Review, American Economic Association, vol. 102(3), pages 65-70, May.
  • Handle: RePEc:aea:aecrev:v:102:y:2012:i:3:p:65-70
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    Cited by:

    1. Dimitrios Bisias & Mark Flood & Andrew W. Lo & Stavros Valavanis, 2012. "A Survey of Systemic Risk Analytics," Annual Review of Financial Economics, Annual Reviews, vol. 4(1), pages 255-296, October.
    2. Mark Flood & Jonathan Katz & Stephen Ong & Adam Smith, 2013. "Cryptography and the Economics of Supervisory Information: Balancing Transparency and Confidentiality," Working Papers 13-08, Office of Financial Research, US Department of the Treasury.
    3. Ho Hwang, Jong, 2013. "A proposal for an open-source financial risk model," LSE Research Online Documents on Economics 59298, London School of Economics and Political Science, LSE Library.
    4. Kasinger, Johannes & Pelizzon, Loriana, 2018. "Financial stability in the EU: A case for micro data transparency," SAFE Policy Letters 67, Goethe University Frankfurt, Research Center SAFE - Sustainable Architecture for Finance in Europe.

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