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Collateral Damage? Micro-Simulation of Transaction Cost Shocks on the Value of Central Bank Collateral

Author

Listed:
  • Rudolf Alvise Lennkh

    (ESM)

  • Florian Walch

    (ECB)

Abstract

Transaction cost shocks in financial markets are known to affect asset prices. This paper analyses how changes in transaction costs may affect the value of assets that banks use to collateralise borrowings in monetary policy operations. Based on a simple asset pricing model and employing a dataset of hypothetical Eurosystem collateral positions, we simulate and quantify the resulting change in collateral value pledged by counterparties to the Eurosystem, resulting from a transaction cost shock. A 10 basis point increase in transaction costs entails a direct -0.30% decrease of collateral value and a -0.07% decrease when adjusted for the expected reduction in the number of trades of each asset. We conclude that banks will on average suffer small collateral losses while selected institutions could face a considerably larger collateral decrease.

Suggested Citation

  • Rudolf Alvise Lennkh & Florian Walch, 2015. "Collateral Damage? Micro-Simulation of Transaction Cost Shocks on the Value of Central Bank Collateral," Working Papers 6, European Stability Mechanism.
    • Handle: RePEc:stm:wpaper:6
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    File URL: https://www.esm.europa.eu/sites/default/files/document/esmwp20151126collateraldamage1.pdf
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    References listed on IDEAS

    as
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    Cited by:

    1. Buschmann, Christian & Schmaltz, Christian, 2017. "Sovereign collateral as a Trojan Horse: Why do we need an LCR+," Journal of Financial Stability, Elsevier, vol. 33(C), pages 311-330.

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    More about this item

    Keywords

    Transaction cost; collateral; central bank; monetary policy;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • E59 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Other
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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