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Transparency and collateral: Central versus bilateral clearing
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posted on 2022-09-30, 03:59 authored by G Antinolfi, F Carapella, Francesco CarliFrancesco CarliThis paper studies the optimal clearing arrangement for bilateral financial contracts in which an assessment of counterparty credit risk is crucial for efficiency. The economy is populated by borrowers and lenders. Borrowers are subject to limited commitment and hold private information about the severity of such lack of commitment. Lenders can acquire information, at a cost, about the commitment of their borrowers, which affects the assessment of counterparty risk. Clearing through a central counterparty allows lenders to mutualize counterparty credit risk, but this insurance may weaken incentives to acquire and reveal information. If information acquisition is incentive-compatible, then lenders choose central clearing. If it is not, they may prefer bilateral clearing either to prevent strategic default or to optimize the allocation of costly collateral.
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Journal
Theoretical EconomicsVolume
17Issue
1Pagination
185 - 217Publisher DOI
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1933-6837eISSN
1555-7561Usage metrics
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