Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/200503
Authors: 
Xiao,Tim
Year of Publication: 
2019
Abstract: 
This paper attempts to assess the economic significance and implications of collateralization in different financial markets, which is essentially a matter of theoretical justification and empirical verification. We present a comprehensive theoretical framework that allows for collateralization adhering to bankruptcy laws. As such, the model can back out differences in asset prices due to collateralized counterparty risk. This framework is very useful for pricing outstanding defaultable financial contracts. By using a unique data set, we are able to achieve a clean decomposition of prices into their credit risk factors. We find empirical evidence that counterparty risk is not overly important in credit-related spreads. Only the joint effects of collateralization 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 financial contracts. We also analyze the difference between cleared and OTC markets.
Subjects: 
unilateral/bilateral collateralization
asset pricing
plumbing of the financial system
swap premium spread
OTC/cleared/listed financial markets
JEL: 
E44
G21
G12
G24
G32
G33
G18
G28
Document Type: 
Working Paper

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