Abstract
An agent-based model is used to determine whether the stability of a financial system can be improved by incorporating BCVA into the pricing of OTC derivatives contracts. The results illustrate that the adjustments of financial institutions’ credit cannot only improve the stability of financial counterparties in credit events but also reduce systemic risk of the entire network. The equity cushion provided by BCVA shields financial intuitions against unanticipated losses. This reduces the frequency and scale of systemic events and the spread of losses. The scale of the benefit is dependent upon the leverage of institutions and is significantly affected by connectivity and the premiums of derivatives contracts.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
References
Acemoglu D, Ozdaglar A, Tahbaz-Salehi A (2015) Systemic risk and stability in financial networks. Am Econ Rev 105(2):564–608
Ali R, Vause N (2016) Systemic risk in derivatives markets: a pilot study using CDS data. Financ Stab Paper 38:1–21
BISb (2015) Statistical release: OTC derivatives statistics at end-June 2015. Discussion paper, Bank for International Settlements
Bliss RR, Kaufman GG (2004) Derivatives and systemic risk: netting, stay, and closeout, pp 1–27
Blume L (2013) Network formation in the presence of contagious risk. In: 12th ACM conference on electronic commerce, pp 1–23
Blume L, Easley D, Kleinberg J, Kleinberg R, Tardos V (2011) Which networks are least susceptible to cascading failure? In: IEEE 52nd annual symposium on foundations of computer science, pp 303–402
Borovkova S, Mouttalibi HLE (2013) Systemic risk and centralized clearing of OTC derivatives: a network approach, Working paper, pp 1–54
Brigo D, Buescu C, Morini M (2011) Impact of the first to default time on bilateral CVA, pp 1–14
Cont R, Minca A (2014) Credit default swaps and systemic risk, pp 1–24
Crepey S (2014) XVA: about CVA, DVA, FVA and other market adjustments, pp 1–30
Eisenberg L, Noe TH (2001) Systemic risk in financial systems. Manag Sci 47:236–249
Green A (2016) XVA: credit, funding and capital valuation adjustments. https://onlinelibrary.wiley.com/doi/book/10.1002/9781119161233
Gregory J (2010) Counterparty credit risk: the new challenge for global financial markets, 3rd edn. Wiley
Hull J (2010) OTC derivatives and central clearing: can all transactions be cleared? Financ Stab Rev Deriv Financ Innov Stab 14:71–80
Kiff J, Elliott J, Kazarian E, Scarlata J, Spackman C (2009) Credit derivatives: systemic risks and policy options, IMF working paper, Working paper 09/254, pp 1–35
Ladley D (2013) Contagion and risk-sharing on the inter-bank market, Discussion papers in economics, Department of Economics, University of Leicester, 11/10, pp 1–45
Pallavicini A, Perini D, Brigo D (2011) Funding valuation adjustment: a consistent framework including CVA, DVA, collateral, netting rules and re-hypothecation, pp 1–23
Russo D (2010) OTC derivatives: financial stability challenges and responses from authorities. Financ Stab Rev Deriv Financ Innov Stab (14), 101–112
Singh M (2010) Collateral, netting and systemic risk in the OTC derivatives market, IMF working paper, pp 1–15
Wellink N (2010) Mitigating systemic risk in OTC derivatives markets. Financ Stab Rev Deriv Financ Innov Stab (14), 131–135
Yavorsky A (2010) OTC derivatives market structure and the credit profiles of wholesale investment banks. Financ Stab Rev Deriv Financ Innov Stab (14), 143–151
Zigrand J-P (2010) What do network theory and endogenous risk theory have to say about the effects of central counterparties on systemic stability? Financ Stab Rev Deriv Financ Innov Stab (14), 153–160
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2019 Springer Nature Singapore Pte Ltd.
About this chapter
Cite this chapter
Ladley, D., Tran, C.T.M. (2019). An Agent-Based Model of BCVA and Systemic Risk. In: Chakrabarti, A., Pichl, L., Kaizoji, T. (eds) Network Theory and Agent-Based Modeling in Economics and Finance. Springer, Singapore. https://doi.org/10.1007/978-981-13-8319-9_14
Download citation
DOI: https://doi.org/10.1007/978-981-13-8319-9_14
Published:
Publisher Name: Springer, Singapore
Print ISBN: 978-981-13-8318-2
Online ISBN: 978-981-13-8319-9
eBook Packages: Economics and FinanceEconomics and Finance (R0)