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Credit Risk and Interdealer Networks

Author

Listed:
  • Or Shachar

    (Federal Reserve Bank of New York)

  • Jennifer La'O

    (Columbia University)

  • Anna Costello

    (Massachusetts Institute of Technology)

  • Nina Boyarchenko

    (Federal Reserve Bank of New York)

Abstract

We study how bank holding companies interact in the corporate bond, syndicated loan, and credit default swap (CDS) markets. These three markets represent different ways to trade credit risk. The corporate bond market allows market participants to trade corporate credit risk directly. Similarly, the syndicated loan market allows direct exposure to corporate credit risk but is limited to only the largest borrowers and has lower secondary market liquidity. Finally, participants in the CDS market take an indirect exposure to the ultimate borrower. CDS markets are the most liquid of the three markets, allowing dealers to more easily assume long and short positions. Moreover, by entering into a CDS contract with another dealer, the firm also exposes itself to counterparty risk. This paper links data from these three different markets to create a more complete picture of how dealers assume and distribute credit risk. We identify key determinants of dealers' net and gross exposures to credit risk. We furthermore map out the interdealer network structures in these markets, allowing us to study how these network structures distribute risk among the dealers and how they shape the total risk borne by the system.

Suggested Citation

  • Or Shachar & Jennifer La'O & Anna Costello & Nina Boyarchenko, 2015. "Credit Risk and Interdealer Networks," 2015 Meeting Papers 1048, Society for Economic Dynamics.
  • Handle: RePEc:red:sed015:1048
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    File URL: https://economicdynamics.org/meetpapers/2015/paper_1048.pdf
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    Cited by:

    1. Park, Alex & Lappas, Petros, 2017. "Evaluating demand charge reduction for commercial-scale solar PV coupled with battery storage," Renewable Energy, Elsevier, vol. 108(C), pages 523-532.
    2. Schachter, Jonathan A. & Mancarella, Pierluigi & Moriarty, John & Shaw, Rita, 2016. "Flexible investment under uncertainty in smart distribution networks with demand side response: Assessment framework and practical implementation," Energy Policy, Elsevier, vol. 97(C), pages 439-449.

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