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SUMMARY:Market diversity under Central Clearing - Capponi\, A (Columbia Un
 iversity)
DTSTART:20140923T130000Z
DTEND:20140923T134500Z
UID:TALK54461@talks.cam.ac.uk
CONTACT:Mustapha Amrani
DESCRIPTION:Co-authors: Allen Cheng (Johns Hopkins University)\, Sriram Ra
 jan (Office of Financial Research) \n\nWe quantify the level of market con
 centration in a financial system where dealers hedge their operations by t
 rading through a Central Counterparty (CCP). We partition individual deale
 r total assets into hedging  and operating portfolios and model interactio
 ns of clearing entities with the CCP using Wright-Fisher diffusion dynamic
 s.\n\nWe derive the unique Nash equilibrium attained when each dealer opti
 mizes its hedge ratio. More specifically\, we identify a relationship betw
 een the effectiveness of the clearing member's hedging portfolio transacte
 d over the CCP and the volatility it experiences. As a consequence of this
  outcome and under optimal hedging\, we show that market concentration ten
 ds to increase over time hence presenting systemic risk. We propose a self
 -financing tax and subsidy system that can effectively control market conc
 entration.  Using the margin model of Duffie\, Scheicher and Vuillemey (20
 14)\, we calibrate our framework via an extensive dataset consisting of CD
 S bilateral exposures cleared through a US-based CCP.  We analyze the cali
 brated model parameters and discuss implications for policy makers.\n\n
LOCATION:Seminar Room 1\, Newton Institute
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