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Markets Evolution after the Credit Crunch

35 Pages Posted: 28 Jan 2013  

Marco Bianchetti

Intesa Sanpaolo - Financial and Market Risk Management; University of Bologna

Mattia Carlicchi

Intesa Sanpaolo - Market Risk Management

Date Written: December 19, 2012

Abstract

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.

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

Suggested Citation

Bianchetti, Marco and Carlicchi, Mattia, Markets Evolution after the Credit Crunch (December 19, 2012). Available at SSRN: https://ssrn.com/abstract=2190138 or http://dx.doi.org/10.2139/ssrn.2190138

Marco Bianchetti (Contact Author)

Intesa Sanpaolo - Financial and Market Risk Management ( email )

Piazza P. Ferrari 10
Milan, 20121
Italy

University of Bologna ( email )

Piazza Scaravilli 2
Bologna, 40100
Italy

Mattia Carlicchi

Intesa Sanpaolo - Market Risk Management ( email )

Piazza P. Ferrari 10
Milan, 20121
Italy

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