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
09d43d33-abd2-4db0-a26a-2f5831ea0a01
Gerding, Enrico
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Wolfe, Simon
9a2367fc-36cc-496a-bbd2-e7346bcbb19e
Bakoush, Mohamed
09d43d33-abd2-4db0-a26a-2f5831ea0a01
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.
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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
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Local EPrints ID: 420776
URI: http://eprints.soton.ac.uk/id/eprint/420776
PURE UUID: 5fff3713-f9b8-40ec-b88b-7f816d29ee9e
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Date deposited: 16 May 2018 16:30
Last modified: 10 Apr 2024 02:02
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Author:
Enrico Gerding
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