Markets Evolution after the Credit Crunch
Intesa Sanpaolo - Financial and Market Risk Management; University of Bologna
Intesa Sanpaolo - Market Risk Management
December 19, 2012
We review the main changes in the interbank market after the financial crisis started in August 2007. In particular, we focus on the fixed income market and we analyse the most relevant empirical evidences regarding the divergence of the existing basis between interbank rates with different tenor, such as Libor and OIS. We also discuss a qualitative explanation of these effects based on the consideration of credit and liquidity variables. Then, we focus our attention on the diffusion of collateral agreements among OTC derivatives market counterparties, and on the consequent change of paradigm for pricing derivatives. We illustrate the main qualitative features of the new market practice, called CSA discounting, and we point out the most relevant issues for market players associated to its adoption.
Number of Pages in PDF File: 35
Keywords: crisis, liquidity, credit, counterparty, risk, fixed income, Libor, Euribor, Eonia, yield curve, collateral, CSA discounting, no arbitrage, pricing, interest rate derivatives, FRA, swap, OIS, basis swap, CDS spread, ECB monetary policy, ISDA
JEL Classification: E43, G12, G13
Date posted: January 28, 2013
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