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OTC Premia

Author

Listed:
  • Gino Cenedese
  • Angelo Ranaldo
  • Michalis Vasios

Abstract

Using unique data at transaction and identity levels, we provide the first systematic study of interest rate swaps traded over the counter (OTC). We find substantial and persistent heterogeneity in derivative prices consistent with a pass-through of regulatory costs on to market prices via so-called valuation adjustments (XVA). A client pays a higher price to buy interest-rate protection from a dealer (i.e., the client pays a higher fixed rate) if the contract is not cleared via a central counterparty. This OTC premium decreases by posting initial margins and with higher buyer's creditworthiness. OTC premia are absent for dealers suggesting bargaining power.

Suggested Citation

  • Gino Cenedese & Angelo Ranaldo & Michalis Vasios, 2018. "OTC Premia," Working Papers on Finance 1818, University of St. Gallen, School of Finance, revised May 2019.
    • Handle: RePEc:usg:sfwpfi:2018:18
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    More about this item

    Keywords

    Interest rate swaps; financial regulation; central clearing; over-the-counter market; valuation adjustments;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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