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To Fully Net or Not to Net: Adverse Effects of Partial Multilateral Netting

Author

Listed:
  • Hamed AMINI

    (Ecole Polytechnique Fédérale de Lausanne)

  • Damir FILIPOVIC

    (Ecole Polytechnique Fédérale de Lausanne and Swiss Finance Institute)

  • Andreea MINCA

    (Cornell University)

Abstract

We study a financial network where forced liquidations of an illiquid asset have a negative impact on its price, thus reinforcing network contagion. We prove uniqueness of the clearing asset price and liability payments under no, partial, and full multilateral netting of interbank liabilities. We show that partial versus full multilateral netting increases bank shortfall, and reduces clearing asset price and aggregate bank surplus. We also show that partial multilateral netting can be worse than no netting at all.

Suggested Citation

  • Hamed AMINI & Damir FILIPOVIC & Andreea MINCA, 2014. "To Fully Net or Not to Net: Adverse Effects of Partial Multilateral Netting," Swiss Finance Institute Research Paper Series 14-63, Swiss Finance Institute, revised Jun 2015.
    • Handle: RePEc:chf:rpseri:rp1463
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    File URL: http://ssrn.com/abstract=2516974
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    Cited by:

    1. Gabrielle Demange & Thibaut Piquard, 2021. "On the market structure of central counterparties in the EU," Working Papers halshs-03107812, HAL.
    2. Wenqian Huang & Albert J. Menkveld & Shihao Yu, 2021. "Central Counterparty Exposure in Stressed Markets," Management Science, INFORMS, vol. 67(6), pages 3596-3617, June.

    More about this item

    Keywords

    Over the Counter Markets; Financial Network; Partial Multilateral Netting;
    All these keywords.

    JEL classification:

    • C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory
    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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