Counterparty risk externality
Subtitle: centralized versus over-the-counter markets
By: Viral V. Acharya, Alberto Bisin
Contributors: Bisin, Alberto; National Bureau of Economic Research
Series: NBER working paper series -- working paper 17000; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 17000.
Publisher: National Bureau of Economic Research
Published: 2011
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Description: "We model the opacity of over-the-counter (OTC) markets in a setup where agents share risks, but have incentives to default and their financial positions are not mutually observable.  We show that this setup results in excess "leverage" in that parties take on short OTC positions that lead to levels of default risk that are higher than Pareto-efficient ones.  In particular, OTC markets feature a "counterparty risk externality" that we show can lead to ex-ante productive inefficiency.  This externality is absent when trading is organized via a centralized clearing mechanism that provides transparency of trade positions, or a centralized counterparty (such as an exchange) that observes all trades and sets prices competitively.  While collateral requirements and subordination of OTC positions in bankruptcy can ameliorate the counterparty risk externality, they are in general inadequate in addressing it fully"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 7/7/2011.

Includes bibliographical references.

Also available in print.

System requirements: Adobe Acrobat Reader.

Mode of access: World Wide Web.