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Systemic risk in clearing houses: Evidence from the European repo market

Author

Listed:
  • Boissel, Charles
  • Derrien, François
  • Ors, Evren
  • Thesmar, David

Abstract

We study how crises affect Central Clearing Counterparties (CCPs). We focus on a large and safe segment of the CCP-cleared repo market during the Eurozone sovereign debt crisis. We develop a simple model to infer CCP stress, which is measured as repo rates’ sensitivity to sovereign credit default swaps (CDS) spreads and jointly captures (1) the effectiveness of haircut policies, (2) CCP-member default risk (conditional on sovereign default), and (3) CCP default risk (conditional on both sovereign and CCP-member default). During 2011, repo rates strongly respond to sovereign risk, particularly for Greece, Italy, Ireland, Portugal and Spain (GIIPS): Repo investors behaved as if the conditional probability of CCP default was substantial.

Suggested Citation

  • Boissel, Charles & Derrien, François & Ors, Evren & Thesmar, David, 2017. "Systemic risk in clearing houses: Evidence from the European repo market," Journal of Financial Economics, Elsevier, vol. 125(3), pages 511-536.
  • Handle: RePEc:eee:jfinec:v:125:y:2017:i:3:p:511-536
    DOI: 10.1016/j.jfineco.2017.06.010
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    More about this item

    Keywords

    Repurchase agreement; Sovereign debt crisis; LTRO; Secured money market lending; Clearing houses;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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