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Wall, Larry D.
Tallman, Ellis W.
Abken, Peter A.
Year of Publication: 
Series/Report no.: 
Working Paper, Federal Reserve Bank of Atlanta 96-6
This paper develops a model in which information losses may be an important part of the cost of an OTC derivatives dealer's failure. A dealer failure forces solvent counterparties of a failed dealer to seek replacement hedges with other dealers. However, by forcing good firms into the derivatives market, the failure provides camouflage for insolvent firms seeking to speculate with a dealer that does not know their credit status. The paper models this information loss and uses the model to quantitatively evaluate a range of scenarios. The results suggest that a market breakdown is unlikely but not quite impossible.
Derivative securities
Liquidity (Economics)
Document Type: 
Working Paper

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