The impact of a dealer's failure on OTC derivatives market liquidity during volatile periods

Arbeitspapier

This paper develops a model in which information losses may be an important part of the cost of an OTC derivatives dealer's failure. A dealer failure forces solvent counterparties of a failed dealer to seek replacement hedges with other dealers. However, by forcing good firms into the derivatives market, the failure provides camouflage for insolvent firms seeking to speculate with a dealer that does not know their credit status. The paper models this information loss and uses the model to quantitatively evaluate a range of scenarios. The results suggest that a market breakdown is unlikely but not quite impossible.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Paper ; No. 96-6

Classification and Topics

• Classification: Wirtschaft
• Subject: Derivative securities ; Liquidity (Economics)

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Wall, Larry D. ; Tallman, Ellis W. ; Abken, Peter A.
• Event: Veröffentlichung
• (who): Federal Reserve Bank of Atlanta
• (where): Atlanta, GA
• (when): 1996

Further information

• Handle: http://hdl.handle.net/10419/100758
• Last update: 10.03.2025, 11:43 AM CET