IDEAS home Printed from https://ideas.repec.org/p/ecb/ecbwps/2003209.html
   My bibliography  Save this paper

A framework for collateral risk control determination

Author

Listed:
  • Cossin, Didier
  • González, Fernando
  • Huang, Zhijiang
  • Backé, Peter

Abstract

This paper derives a general framework for collateral risk control determination in repurchase transactions or repos. The objective is to treat consistently heterogeneous collateral so that the collateral taker has a similar risk exposure whatever the collateral pledged. The framework measures the level of risk with the probability of incurring a loss higher than a pre-specified level given two well-known parameters used to manage the intrinsic risk of collateral: marking to market and haircuts. It allows for the analysis in a self-contained closed form of the way in which different relevant factors interact in the risk control of collateral (e.g. marking to market frequency, level of volatility of interest rates, time to capture and liquidity risk, probability of default of counterparty, etc.). The framework, which combines the recent theoretical literature on credit and interest risk, provides an alternative quantifiable and objective approach to the existing more ad-hoc rule-based methods used in hair cut determination. JEL Classification: E50, E58, G21, G10

Suggested Citation

  • Cossin, Didier & González, Fernando & Huang, Zhijiang & Backé, Peter, 2003. "A framework for collateral risk control determination," Working Paper Series 209, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:2003209
    Note: 338288
    as

    Download full text from publisher

    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp209.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Henri Pagès, 2001. "Can liquidity risk be subsumed in credit risk? A case study from Brady bond prices," BIS Working Papers 101, Bank for International Settlements.
    2. Robert A. Jarrow & David Lando & Stuart M. Turnbull, 2008. "A Markov Model for the Term Structure of Credit Risk Spreads," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 18, pages 411-453, World Scientific Publishing Co. Pte. Ltd..
    3. Duffie, Darrell & Singleton, Kenneth J, 1997. "An Econometric Model of the Term Structure of Interest-Rate Swap Yields," Journal of Finance, American Finance Association, vol. 52(4), pages 1287-1321, September.
    4. Furfine, Craig H & Stehm, Jeff, 1998. "Analyzing Alternative Intraday Credit Policies in Real-Time Gross Settlement Systems," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(4), pages 832-848, November.
    5. 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.
    6. Nyborg, Kjell G. & Strebulaev, Ilya A., 2001. "Collateral and short squeezing of liquidity in fixed rate tenders," Journal of International Money and Finance, Elsevier, vol. 20(6), pages 769-792, November.
    7. David Heath & Robert Jarrow & Andrew Morton, 2008. "Bond Pricing And The Term Structure Of Interest Rates: A New Methodology For Contingent Claims Valuation," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 13, pages 277-305, World Scientific Publishing Co. Pte. Ltd..
    8. repec:zbw:bofrdp:2000_002 is not listed on IDEAS
    9. Sanjiv R. Das, 1998. "Poisson-Guassian Processes and the Bond Markets," NBER Working Papers 6631, National Bureau of Economic Research, Inc.
    10. Duffie, Darrell & Singleton, Kenneth J, 1999. "Modeling Term Structures of Defaultable Bonds," The Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 687-720.
    11. Lotz, Christopher & Schlogl, Lutz, 2000. "Default risk in a market model," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 301-327, January.
    12. Robert A. Jarrow & Fan Yu, 2008. "Counterparty Risk and the Pricing of Defaultable Securities," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 20, pages 481-515, World Scientific Publishing Co. Pte. Ltd..
    13. Margrabe, William, 1978. "The Value of an Option to Exchange One Asset for Another," Journal of Finance, American Finance Association, vol. 33(1), pages 177-186, March.
    14. Hirsa, Ali & Neftci, Salih N., 2013. "An Introduction to the Mathematics of Financial Derivatives," Elsevier Monographs, Elsevier, edition 3, number 9780123846822.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Anouk Levels & Jeannette Capel, 2012. "Is Collateral Becoming Scarce? Evidence for the euro area," DNB Occasional Studies 1001, Netherlands Central Bank, Research Department.
    2. Jialu Ji & Hongxing Zheng & Jia Qi & Mingjun Ji & Lingrui Kong & Shengzhong Ji, 2023. "Financial and Logistical Service Strategy of Third-Party Logistics Enterprises in Cross-Border E-Commerce Environment," Sustainability, MDPI, vol. 15(8), pages 1-20, April.
    3. Ran Zhang & Jing Zhang & Shuang Xu, 2015. "Determining pledged loan-to-value ratio: an option pricing perspective," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 1(1), pages 1-13, December.
    4. Hui Zhang & Wenyu Meng & Xiaojie Wang & Jianwei Zhang, 2017. "Application of BSDE in Standard Inventory Financing Loan," Discrete Dynamics in Nature and Society, Hindawi, vol. 2017, pages 1-6, June.
    5. Ascari, Guido & Rankin, Neil, 2007. "Perpetual youth and endogenous labor supply: A problem and a possible solution," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 708-723, December.
    6. Jiali Liao & Ted Theodosopoulos, 2005. "Study on optimal timing of mark-to-market for contingent credit risk control," Papers math/0506077, arXiv.org.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Roger Walder, 2002. "Dynamic Allocation of Treasury and Corporate Bond Portfolios," FAME Research Paper Series rp64, International Center for Financial Asset Management and Engineering.
    2. Didier Cossin & Zhijiang Huang & Daniel Aunon-Nerin & Fer nando González, 2002. "A Framework for Collateral Risk Control Determination," FAME Research Paper Series rp61, International Center for Financial Asset Management and Engineering.
    3. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    4. Suresh M. Sundaresan, 2000. "Continuous‐Time Methods in Finance: A Review and an Assessment," Journal of Finance, American Finance Association, vol. 55(4), pages 1569-1622, August.
    5. Duffie, Darrell, 2003. "Intertemporal asset pricing theory," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 11, pages 639-742, Elsevier.
    6. repec:wyi:journl:002109 is not listed on IDEAS
    7. Duffie, Darrell, 2005. "Credit risk modeling with affine processes," Journal of Banking & Finance, Elsevier, vol. 29(11), pages 2751-2802, November.
    8. Samuel Chege Maina, 2011. "Credit Risk Modelling in Markovian HJM Term Structure Class of Models with Stochastic Volatility," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 1-2011, January-A.
    9. Gunter Meissner & Seth Rooder & Kristofor Fan, 2013. "The impact of different correlation approaches on valuing credit default swaps with counterparty risk," Quantitative Finance, Taylor & Francis Journals, vol. 13(12), pages 1903-1913, December.
    10. Jennie Bai & Pierre Collin-Dufresne & Robert S. Goldstein & Jean Helwege, 2012. "On bounding credit event risk premia," Staff Reports 577, Federal Reserve Bank of New York.
    11. Samuel Chege Maina, 2011. "Credit Risk Modelling in Markovian HJM Term Structure Class of Models with Stochastic Volatility," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 5, July-Dece.
    12. Theodore M. Barnhill & Panagiotis Papapanagiotou & Liliana Schumacher, 2002. "Measuring Integrated Market and Credit Risk in Bank Portfolios: An Application to a Set of Hypothetical Banks Operating in South Africa," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 11(5), pages 401-443, December.
    13. Kris Jacobs & Xiaofei Li, 2008. "Modeling the Dynamics of Credit Spreads with Stochastic Volatility," Management Science, INFORMS, vol. 54(6), pages 1176-1188, June.
    14. Kwamie Dunbar, 2008. "US corporate default swap valuation: the market liquidity hypothesis and autonomous credit risk," Quantitative Finance, Taylor & Francis Journals, vol. 8(3), pages 321-334.
    15. Pierre Collin-Dufresne & Robert S. Goldstein & Jean Helwege, 2010. "Is Credit Event Risk Priced? Modeling Contagion via the Updating of Beliefs," NBER Working Papers 15733, National Bureau of Economic Research, Inc.
    16. Bjork, Tomas, 2009. "Arbitrage Theory in Continuous Time," OUP Catalogue, Oxford University Press, edition 3, number 9780199574742.
    17. Chava, Sudheer & Jarrow, Robert, 2008. "Modeling loan commitments," Finance Research Letters, Elsevier, vol. 5(1), pages 11-20, March.
    18. SOLNIK, Bruno & COLLIN-DUFRESNE, Pierre, 2000. "On the term structure of default premia in the Swap and Libor markets," HEC Research Papers Series 704, HEC Paris.
    19. Giesecke, Kay & Longstaff, Francis A. & Schaefer, Stephen & Strebulaev, Ilya, 2011. "Corporate bond default risk: A 150-year perspective," Journal of Financial Economics, Elsevier, vol. 102(2), pages 233-250.
    20. Jobst, Norbert J. & Zenios, Stavros A., 2005. "On the simulation of portfolios of interest rate and credit risk sensitive securities," European Journal of Operational Research, Elsevier, vol. 161(2), pages 298-324, March.
    21. Rong Fan & Joseph Haubrich & Peter Ritchken & James Thomson, 2003. "Getting the Most Out of a Mandatory Subordinated Debt Requirement," Journal of Financial Services Research, Springer;Western Finance Association, vol. 24(2), pages 149-179, October.

    More about this item

    Keywords

    central banks; collateral; Default risk; monetary policy operations; repurchase transactions;
    All these keywords.

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ecb:ecbwps:2003209. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Official Publications (email available below). General contact details of provider: https://edirc.repec.org/data/emieude.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.