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Risk-Cost Frontier and Collateral Valuation in Securities Settlement Systems for Extreme Market Events


  • Alejandro García
  • Ramazan Gençay


The authors examine how the use of extreme value theory yields collateral requirements that are robust to extreme fluctuations in the market price of the asset used as collateral. In particular, they study the risk and cost attributes of market risk measures by constructing a risk-cost frontier for the collateral pledged to cover exposures in a securities settlement system. The frontier can be used as a diagnostic tool to understand the risk-cost trade-off of different methodologies to calculate collateral value (haircuts) and select the most efficient alternative in a variety of settings.

Suggested Citation

  • Alejandro García & Ramazan Gençay, 2006. "Risk-Cost Frontier and Collateral Valuation in Securities Settlement Systems for Extreme Market Events," Staff Working Papers 06-17, Bank of Canada.
  • Handle: RePEc:bca:bocawp:06-17

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    References listed on IDEAS

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    Cited by:

    1. Douglas D. Evanoff & Daniela Russo & Robert Steigerwald, 2006. "Policymakers, researchers, and practitioners discuss the role of central counterparties," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q IV, pages 2-21.

    More about this item


    Financial stability; Payment; clearing; and settlement systems; Econometric and statistical methods;

    JEL classification:

    • G0 - Financial Economics - - General
    • G1 - Financial Economics - - General Financial Markets
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General

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