Default Contagion and Systemic Risk with Cross-Ownership of Equities, Debts, and Financial Derivatives

25 Pages Posted: 1 Feb 2017 Last revised: 6 Mar 2020

See all articles by Katsumasa Nishide

Katsumasa Nishide

Graduate School of Economics, Hitotsubashi University

Teruyoshi Suzuki

Hokkaido Univeristy

Kyoko Yagi

Tokyo Metropolitan University

Date Written: March 5, 2020

Abstract

We consider a situation in which general financial products such as options, CDS, and other derivatives, are traded to investigate the effect of cross-ownerships on market stability. We prove the existence and uniqueness of a clearing payment vector under the assumption of the fictitious default algorithm with financial covenants, which reflects technical defaults often observed in actual financial markets. Unlike other related studies, the sufficient condition for the existence involves not only the cross-ownership structure but also the risk exposures associated with the securities cross-held. Some numerical results are presented to show that stronger connectedness via CDSs leads to a more unstable market and higher systemic risk, especially with higher default costs.

Keywords: cross-ownership, default cost, clearing payment, credit default swap, default contagion, systemic risk

JEL Classification: G13, G32, G33, L14

Suggested Citation

Nishide, Katsumasa and Suzuki, Teruyoshi and Yagi, Kyoko, Default Contagion and Systemic Risk with Cross-Ownership of Equities, Debts, and Financial Derivatives (March 5, 2020). Available at SSRN: https://ssrn.com/abstract=2853258 or http://dx.doi.org/10.2139/ssrn.2853258

Katsumasa Nishide (Contact Author)

Graduate School of Economics, Hitotsubashi University ( email )

2-1 Naka Kunitachi-shi
Tokyo 186-8601
Japan

HOME PAGE: http://www1.econ.hit-u.ac.jp/nishide/

Teruyoshi Suzuki

Hokkaido Univeristy ( email )

1-3 Ainosato 5-3
Kita-ku Sapporo, Hokkaido 002-8501
Japan

Kyoko Yagi

Tokyo Metropolitan University ( email )

1-4-1 Marunouchi
Chiyoda-ku, Tokyo 100-0005
Japan
+81-3-6268-0529 (Phone)

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