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Assessing financial distress dependencies in OTC markets: a new approach by Trade Repositories data

Bonollo, Michele and Crimaldi, Irene and Flori, Andrea and Gianfagna, Laura and Pammolli, Fabio Assessing financial distress dependencies in OTC markets: a new approach by Trade Repositories data. EIC working paper series #10/2015 IMT Institute for Advanced Studies Lucca

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After the recent financial crisis, it is undoubtedly recognized the importance of assessing not only the risk of distress for a single \financial entity", but also the distress dependencies between the different \entities", where by \entities" we mean in a broad sense any relevant cluster of products, risk factors, counterparties. In this paper, we focus on the Interest Rate Swap (IRS) segment as a significant fraction of the OTC market. We define a distress indicator by combining some distress drivers, such as averaged volumes, liquidity, volatility and bid-ask proxies. Hence, we analyse the distress dependencies among sub-markets identified by the segmentation of the IRS market according to contractual and financial features. We try to combine in an innovative way some new ingredients, namely the more granular data on OTC derivatives available from the trade repositories along with the classical JPoD approach introduced in the recent years by the IMF for studying the distress interdependence structure among financial institutions. The proposed technique seems to be quite promising. Indeed, the results are quite close to the practical intuition. At the best of our knowledge, this work is the first empirical study based on trade repositories' data for assessing systemic risk.

Item Type: Working Paper (EIC working paper series)
Additional Information: This paper is a preliminary version of the article published in Financial Markets and Portfolio Management, 2016(4)
Uncontrolled Keywords: Keywords: Financial distress interdependence, Joint probability of distress, Interest rate swap, Systemic risk, Trade repositories. Jel codes: G01, G18, G19
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HF Commerce
H Social Sciences > HG Finance
Research Area: Economics and Institutional Change
Depositing User: Caterina Tangheroni
Date Deposited: 23 Oct 2015 12:05
Last Modified: 17 Nov 2016 10:35
URI: http://eprints.imtlucca.it/id/eprint/2781

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