Liquidation equilibrium with seniority and hidden CDO
The aim of our paper is to price credit derivatives written on a single name when this name is a bank. Indeed, due to the special structure of the balance sheet of a bank and to the interconnections with other institutions of the financial system, the standard pricing formulas do not apply and their use can imply severe mispricing. The pricing of credit derivatives written on a single bank name requires a joint analysis of the risks of all banks directly or indirectly interconnected with the bank of interest. Each name cannot be priced in isolation, but the banking system must be treated as a whole. It is necessary to analyze the contagion of losses among banks, especially the equilibrium of joint defaults and recovery rates at liquidation time. We show the existence and uniqueness of such an equilibrium. Then the standard pricing formulas are modified by adding a premium to capture the contagion effects.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 37 (2013)
Issue (Month): 12 ()
|Contact details of provider:|| Web page: http://www.elsevier.com/locate/jbf|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Gourieroux, C & Laffont, J J & Monfort, A, 1980.
"Coherency Conditions in Simultaneous Linear Equation Models with Endogenous Switching Regimes,"
Econometric Society, vol. 48(3), pages 675-695, April.
- C. Gourieroux & Jean-Jacques Laffont & A. Monfort, 1979. "Coherency Conditions In Simultaneous Linear Equation Models With Endogenous Switching Regimes," NBER Working Papers 0343, National Bureau of Economic Research, Inc.
- repec:hal:wpaper:halshs-00662513 is not listed on IDEAS
- George Sheldon & Martin Maurer, 1998. "Interbank Lending and Systemic Risk: An Empirical Analysis for Switzerland," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 134(IV), pages 685-704, December.
- Upper, Christian & Worms, Andreas, 2002.
"Estimating Bilateral Exposures in the German Interbank Market: Is there a Danger of Contagion?,"
Discussion Paper Series 1: Economic Studies
2002,09, Deutsche Bundesbank, Research Centre.
- Christian Upper & Andreas Worms, 2001. "Estimating bilateral exposures in the German interbank market: is there a danger of contagion?," BIS Papers chapters, in: Bank for International Settlements (ed.), Marrying the macro- and micro-prudential dimensions of financial stability, volume 1, pages 211-229 Bank for International Settlements.
- Upper, Christian & Worms, Andreas, 2004. "Estimating bilateral exposures in the German interbank market: Is there a danger of contagion?," European Economic Review, Elsevier, vol. 48(4), pages 827-849, August.
- Demange, Gabrielle, 2012.
"Contagion in financial networks: A threat index,"
CEPR Discussion Papers
8793, C.E.P.R. Discussion Papers.
- Larry Eisenberg & Thomas H. Noe, 2001. "Systemic Risk in Financial Systems," Management Science, INFORMS, vol. 47(2), pages 236-249, February.
- C. H. Furfine, 1999. "Interbank exposures: quantifying the risk of contagion," BIS Working Papers 70, Bank for International Settlements.
- Degryse, H.A. & Nguyen, G., 2004.
"Interbank Exposures : An Empirical Examination of Systemic Risk in the Belgian Banking System,"
2004-4, Tilburg University, Center for Economic Research.
- Hans Degryse & Grégory Nguyen, 2004. "Interbank exposures: an empirical examination of systemic risk in the Belgian banking system," Working Paper Research 43, National Bank of Belgium.
- Craig Furfine, 1999. "Interbank exposures: quantifying the risk of contagion," Proceedings 633, Federal Reserve Bank of Chicago.
- Merton, Robert C., 1973.
"On the pricing of corporate debt: the risk structure of interest rates,"
684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
- Gourieroux, C. & Heam, J.C. & Monfort, A., 2012.
"Bilateral Exposures and Systemic Solvency Risk,"
414, Banque de France.
- repec:dau:papers:123456789/14967 is not listed on IDEAS
When requesting a correction, please mention this item's handle: RePEc:eee:jbfina:v:37:y:2013:i:12:p:5261-5274. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu)
If references are entirely missing, you can add them using this form.