Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/197768
Authors: 
Xiao, Tim
Year of Publication: 
2017
Citation: 
[Journal:] Journal of Derivatives [Volume:] 24 [Issue:] 4 [Pages:] 8-20 [ISSN:] 1074-1240
Abstract: 
This paper presents a new model for pricing OTC derivatives subject to collateralization. It allows for collateral posting adhering to bankruptcy laws. As such, the model can back out the market price of a collateralized contract. This framework is very useful for valuing outstanding derivatives. Using a unique dataset, we find empirical evidence that credit risk alone is not overly important in determining credit-related spreads. Only accounting for both collateral arrangement and credit risk can sufficiently explain unsecured credit costs. This finding suggests that failure to properly account for collateralization may result in significant mispricing of derivatives. We also empirically gauge the impact of collateral agreements on risk measurements. Our findings indicate that there are important interactions between market and credit risk.
Subjects: 
collateralization
asset pricing
plumbing of financial system
swap premium spread
CVA
VaR
interaction between market and credit risk
Published Version’s DOI: 
Document Type: 
Article
Document Version: 
Accepted Manuscript (Postprint)
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