Abstract

http://ssrn.com/abstract=1340660
 
 

References (26)



 
 

Citations (12)



 


 



The Economics of Clearing in Derivatives Markets: Netting, Asymmetric Information, and the Sharing of Default Risks Through a Central Counterparty


Craig Pirrong


University of Houston - Department of Finance

January 8, 2009


Abstract:     
Credit derivatives have received intense scrutiny -- and criticism -- as a major contributor to the ongoing financial crisis. In response, regulators have proposed requiring the formation of a central clearinghouse to share default risk on these contracts. A comparative economic analysis of the costs and benefits of alternative default risk sharing mechanisms casts considerable doubt on the advisability of central clearing of credit derivatives. These products are likely to be subject to severe information asymmetry problems regarding their value, risk, and the creditworthiness of those who trade them, and these information asymmetries are likely to be less severe in bilateral markets than in centrally cleared systems. Moreover, although regulators have argued that clearing would reduce systemic risk, a more complete analysis demonstrates that clearing could actually increase risks to the broader financial system.

Number of Pages in PDF File: 78

Keywords: derivatives, default risk, counterparty risk, clearing

JEL Classification: G18, G21, G28

working papers series


Download This Paper

Date posted: February 11, 2009  

Suggested Citation

Pirrong, Craig, The Economics of Clearing in Derivatives Markets: Netting, Asymmetric Information, and the Sharing of Default Risks Through a Central Counterparty (January 8, 2009). Available at SSRN: http://ssrn.com/abstract=1340660 or http://dx.doi.org/10.2139/ssrn.1340660

Contact Information

Craig Pirrong (Contact Author)
University of Houston - Department of Finance ( email )
Houston, TX 77204
United States
Feedback to SSRN


Paper statistics
Abstract Views: 5,010
Downloads: 1,479
Download Rank: 5,866
References:  26
Citations:  12

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo8 in 0.468 seconds