The University of Southampton
University of Southampton Institutional Repository

Interest rate swaps clearing and systemic risk

Interest rate swaps clearing and systemic risk
Interest rate swaps clearing and systemic risk
We develop a model to highlight the systemic risks of clearing OTC interest rate swaps. Participants in the IRS trading and clearing ecosystem are mainly dealers and clients which we model as heterogeneous agents that interact with each other through swap contracts in order to achieve their objectives based on simple strategies. We then build a network of the credit exposures that arise due to interactions between agents. Next, we analyze the interconnectedness, systemic risk, and stability of this network. Our model illustrates how greater interest rate volatility can be translated into systemic liquidity pressure on market participants. These endogenously formulated liquidity shocks may spillover to clients in the form of asset fire sales, or to dealers in the form of funding pressures. Furthermore, greater interconnectedness in the credit exposures network may amplify these fragilities.
American Economic Association
Bakoush, Mohamed
661c4408-3dde-4b6e-9964-6dd7175e5813
Gerding, Enrico
d9e92ee5-1a8c-4467-a689-8363e7743362
Wolfe, Simon
9a2367fc-36cc-496a-bbd2-e7346bcbb19e
Bakoush, Mohamed
661c4408-3dde-4b6e-9964-6dd7175e5813
Gerding, Enrico
d9e92ee5-1a8c-4467-a689-8363e7743362
Wolfe, Simon
9a2367fc-36cc-496a-bbd2-e7346bcbb19e

Bakoush, Mohamed, Gerding, Enrico and Wolfe, Simon (2017) Interest rate swaps clearing and systemic risk. In American Economic Association (AEA): The 2017 Annual Meeting. American Economic Association..

Record type: Conference or Workshop Item (Paper)

Abstract

We develop a model to highlight the systemic risks of clearing OTC interest rate swaps. Participants in the IRS trading and clearing ecosystem are mainly dealers and clients which we model as heterogeneous agents that interact with each other through swap contracts in order to achieve their objectives based on simple strategies. We then build a network of the credit exposures that arise due to interactions between agents. Next, we analyze the interconnectedness, systemic risk, and stability of this network. Our model illustrates how greater interest rate volatility can be translated into systemic liquidity pressure on market participants. These endogenously formulated liquidity shocks may spillover to clients in the form of asset fire sales, or to dealers in the form of funding pressures. Furthermore, greater interconnectedness in the credit exposures network may amplify these fragilities.

Full text not available from this repository.

More information

e-pub ahead of print date: 6 January 2017
Venue - Dates: American Economic Association 2017 Annual Meeting, Chicago, United States, 2017-01-06 - 2017-01-08

Identifiers

Local EPrints ID: 420776
URI: https://eprints.soton.ac.uk/id/eprint/420776
PURE UUID: 5fff3713-f9b8-40ec-b88b-7f816d29ee9e
ORCID for Mohamed Bakoush: ORCID iD orcid.org/0000-0001-9624-9828

Catalogue record

Date deposited: 16 May 2018 16:30
Last modified: 06 Jun 2018 12:17

Export record

Contributors

Author: Mohamed Bakoush ORCID iD
Author: Enrico Gerding
Author: Simon Wolfe

University divisions

Download statistics

Downloads from ePrints over the past year. Other digital versions may also be available to download e.g. from the publisher's website.

View more statistics

Atom RSS 1.0 RSS 2.0

Contact ePrints Soton: eprints@soton.ac.uk

ePrints Soton supports OAI 2.0 with a base URL of https://eprints.soton.ac.uk/cgi/oai2

This repository has been built using EPrints software, developed at the University of Southampton, but available to everyone to use.

We use cookies to ensure that we give you the best experience on our website. If you continue without changing your settings, we will assume that you are happy to receive cookies on the University of Southampton website.

×