Mar 09, 2017
from 01:00 PM to 02:00 PM
|Where||Room W4.03, Cambridge Judge Business School|
|Contact Name||Kat Ndrepepaj|
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H. Peyton Young is the James Meade Professor of Economics at the University of Oxford.
Among Professor Young's research interests are the evolution of social norms and institutions, learning in strategic environments, game theory and finance.
Title: Contagion in the CDS Market
This paper analyzes counterparty exposures in the credit default swaps market and examines the impact of severe credit shocks on the demand for variation margin, which are the payments that counterparties make to o set price changes. We employ the Federal Reserve's Comprehensive Capital Analysis and Review (CCAR) shocks and estimate their impact on the value of CDS contracts and the variation margin owed. Large and sudden demands for variation margin may exceed a firm's ability to pay, leading some firms to delay or forego payments. These shortfalls can become amplified through the network of exposures. Of particular importance in cleared markets is the potential impact on the central counterparty clearing house. Although it is a central node according to conventional measures of network centrality, the CCP contributes less to contagion than do several peripheral firms that are large net sellers of CDS protection.
During a credit shock these firms can suffer large shortfalls that lead to further shortfalls for their counterparties, amplifying the initial shock.