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A Framework for Collateral Risk Control Determination

Author

Listed:
  • Didier Cossin

    (HEC-University of Lausanne, FAME and IMD)

  • Zhijiang Huang

    (HEC-University of Lausanne and FAME)

  • Daniel Aunon-Nerin

    (HEC-University of Lausanne and FAME)

  • Fer nando González

    (European Central Bank,Risk Management Division)

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 prespeci?ed 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 quanti ?able and objective approach to the existing more ad-hoc rule-based methods used in haircut determination.

Suggested Citation

  • 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.
    • Handle: RePEc:fam:rpseri:rp61
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    References listed on IDEAS

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    More about this item

    Keywords

    Collateral; Repurchase Transactions; Default Risk; Central Banks; Monetary Policy Operations;
    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)

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