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Risk-Cost Frontier and Collateral Valuation in Securities Settlement Systems for Extreme Market Events

Author

Listed:
  • Alejandro García
  • Ramazan Gençay

Abstract

The authors examine how the use of extreme value theory yields collateral requirements that are robust to extreme fluctuations in the market price of the asset used as collateral. In particular, they study the risk and cost attributes of market risk measures by constructing a risk-cost frontier for the collateral pledged to cover exposures in a securities settlement system. The frontier can be used as a diagnostic tool to understand the risk-cost trade-off of different methodologies to calculate collateral value (haircuts) and select the most efficient alternative in a variety of settings.

Suggested Citation

  • Alejandro García & Ramazan Gençay, 2006. "Risk-Cost Frontier and Collateral Valuation in Securities Settlement Systems for Extreme Market Events," Staff Working Papers 06-17, Bank of Canada.
    • Handle: RePEc:bca:bocawp:06-17
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    File URL: https://www.bankofcanada.ca/wp-content/uploads/2010/02/wp06-17.pdf
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    Citations

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    Cited by:

    1. Alejandro García & Ramazan Gençay, 2007. "Managing Adverse Dependence for Portfolios of Collateral in Financial Infrastructures," Staff Working Papers 07-25, Bank of Canada.
    2. Alexandru Stanga, 2008. "Measuring market risk: a copula and extreme value approach," Advances in Economic and Financial Research - DOFIN Working Paper Series 13, Bucharest University of Economics, Center for Advanced Research in Finance and Banking - CARFIB.
    3. Jonathan Chiu & Alexandra Lai, 2007. "Modelling Payments Systems: A Review of the Literature," Staff Working Papers 07-28, Bank of Canada.
    4. James Chapman & Jonathan Chiu & Miguel Molico, 2011. "Central bank haircut policy," Annals of Finance, Springer, vol. 7(3), pages 319-348, August.
    5. Douglas D. Evanoff & Daniela Russo & Robert Steigerwald, 2006. "Policymakers, researchers, and practitioners discuss the role of central counterparties," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 30(Q IV), pages 2-21.

    More about this item

    Keywords

    Financial stability; Payment clearing and settlement systems; Econometric and statistical methods;
    All these keywords.

    JEL classification:

    • G0 - Financial Economics - - General
    • G1 - Financial Economics - - General Financial Markets
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General

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