Risk-Sharing or Risk-Taking? Counterparty Risk, Incentives and Margins
Copyright policy )Risk-Sharing or Risk-Taking? Counterparty Risk, Incentives and Margins
ABSTRACTDerivatives activity, motivated by risk‐sharing, can breed risk‐taking. Bad news about the risk of an asset underlying a derivative increases protection sellers' expected liability and undermines their risk‐prevention incentives. This limits risk‐sharing, creates endogenous counterparty risk, and can lead to contagion from news about the hedged risk to the balance sheet of protection sellers. Margin calls after bad news can improve protection sellers' incentives and in turn enhance risk‐sharing. Central clearing can provide insurance against counterparty risk but must be designed to preserve risk‐prevention incentives.
Moral Hazard, 330, Counterparty risk, ddc:330, Other Depository Institutions, counterparty risk, derivatives, Insurance, margin requirements, moral hazard, Insurance Companies, Micro Finance Institutions, Asymmetric and Private Information Banks, D82, Insurance, derivatives, G21, G22, Mortgages Insurance, [SHS.GESTION] Humanities and Social Sciences/Business administration, B- ECONOMIE ET FINANCE, margin requirements
Moral Hazard, 330, Counterparty risk, ddc:330, Other Depository Institutions, counterparty risk, derivatives, Insurance, margin requirements, moral hazard, Insurance Companies, Micro Finance Institutions, Asymmetric and Private Information Banks, D82, Insurance, derivatives, G21, G22, Mortgages Insurance, [SHS.GESTION] Humanities and Social Sciences/Business administration, B- ECONOMIE ET FINANCE, margin requirements
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