Counterparty credit limits : an effective tool for mitigating counterparty risk?
- A counterparty credit limit (CCL) is a limit imposed by a financial institution to cap its maximum possible exposure to a specified counterparty. Although CCLs are designed to help institutions mitigate counterparty risk by selective diversification of their exposures, their implementation restricts the liquidity that institutions can access in an otherwise centralized pool. We address the question of how this mechanism impacts trade prices and volatility, both empirically and via a new model of trading with CCLs. We find empirically that CCLs cause little impact on trade. However, our model highlights that in extreme situations, CCLs could serve to destabilize prices and thereby influence systemic risk.
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| Author: | Martin Gould, Nikolaus HautschORCiDGND, Sam D. Howison, Mason A. Porter |
|---|---|
| URN: | urn:nbn:de:hebis:30:3-438673 |
| URL: | https://ssrn.com/abstract=3043112 |
| Parent Title (English): | Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 581 |
| Series (Serial Number): | CFS working paper series (581) |
| Publisher: | Center for Financial Studies |
| Place of publication: | Frankfurt, M. |
| Document Type: | Working Paper |
| Language: | English |
| Year of Completion: | 2017 |
| Year of first Publication: | 2017 |
| Publishing Institution: | Universitätsbibliothek Johann Christian Senckenberg |
| Release Date: | 2017/10/17 |
| Tag: | Counterparty Credit Limits; Counterparty Risk; Market Design; Price Formation; Systemic Risk |
| Issue: | September 26, 2017 |
| Page Number: | 39 |
| HeBIS-PPN: | 419152288 |
| Institutes: | Wirtschaftswissenschaften / Wirtschaftswissenschaften |
| Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS) | |
| Dewey Decimal Classification: | 3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft |
| Sammlungen: | Universitätspublikationen |
| Licence (German): |  Deutsches Urheberrecht |
