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Assessing financial distress dependencies in OTC markets: a new approach using trade repositories data

Author

Listed:
  • Michele Bonollo

    () (Iason Ltd)

  • Irene Crimaldi

    () (IMT School for Advanced Studies Lucca)

  • Andrea Flori

    () (IMT School for Advanced Studies Lucca)

  • Laura Gianfagna

    () (IMT School for Advanced Studies Lucca)

  • Fabio Pammolli

    () (IMT School for Advanced Studies Lucca)

Abstract

Abstract In this paper, we study the relationships among financial market sub-segments as a way to identify potential financial distress through increased co-movements among them. To study how sub-markets are mutually co-dependent, we combine granular data on over-the-counter derivatives by trade repositories and the joint probability of distress (JPoD) approach introduced by the International Monetary Fund. We define an indicator that combines several distress drivers and observe that results on co-dependencies are similar to those that would be expected: similarities between financial and contractual terms seem to be responsible for stronger co-movements among sub-markets. However, high values for JPoD even in correspondence of quite dissimilar sub-markets suggest the presence of other drivers that should be investigated in future research. To the best of our knowledge, this is the first empirical study on systemic risk assessment based on micro-founded trade repositories’ data on interest rate swaps.

Suggested Citation

  • Michele Bonollo & Irene Crimaldi & Andrea Flori & Laura Gianfagna & Fabio Pammolli, 2016. "Assessing financial distress dependencies in OTC markets: a new approach using trade repositories data," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 30(4), pages 397-426, November.
  • Handle: RePEc:kap:fmktpm:v:30:y:2016:i:4:d:10.1007_s11408-016-0275-7
    DOI: 10.1007/s11408-016-0275-7
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Financial distress interdependence; Joint probability of distress; Interest rate swaps; Systemic risk; Micro-founded trade repositories’ data;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G19 - Financial Economics - - General Financial Markets - - - Other

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