Network Structure and Counterparty Credit Risk
In this paper we offer a novel type of network model, which is capable of capturing the precise structure of a financial market based, for example, on empirical findings. With the attached stochastic framework it is further possible to study how an arbitrary network structure and its expected counterparty credit risk are analytically related to each other. This allows us, for the first time, to model and to analytically analyse the precise structure of a financial market. It further enables us to draw implications for the study of systemic risk. We apply the powerful theory of characteristic functions and Hilbert transforms, which have not been used in this combination before. We then characterise Eulerian digraphs as distinguished exposure structures and we show that considering the precise network structures is crucial for the study of systemic risk. The introduced network model is then applied to study the features of an over-the-counter and a centrally cleared market. We also give a more general answer to the question of whether it is more advantageous for the overall counterparty credit risk to clear via a central counterparty or classically bilateral between the two involved counterparties. We then show that the exact market structure is a crucial factor in answering the raised question.
Year of publication: |
2015-04
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Authors: | Felbert, Alexander von |
Institutions: | arXiv.org |
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