Journal article
Counterparty credit limits: the impact of a risk-mitigation measure on everyday trading
- Abstract:
- A counterparty credit limit (CCL) is a limit that is imposed by a financial institution to cap its maximum possible exposure to a specified counterparty. CCLs help institutions to mitigate counterparty credit risk via selective diversification of their exposures. In this paper, we analyze how CCLs impact the prices that institutions pay for their trades during everyday trading. We study a high-quality data set from a large electronic trading platform in the foreign exchange spot market, which enables institutions to apply CCLs. We find empirically that CCLs had little impact on the vast majority of trades in this data. We also study the impact of CCLs using a new model of trading. By simulating our model with different underlying CCL networks, we highlight that CCLs can have a major impact in some situations.
- Publication status:
- Published
- Peer review status:
- Peer reviewed
Actions
Access Document
- Files:
-
-
(Preview, Accepted manuscript, pdf, 2.6MB, Terms of use)
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- Publisher copy:
- 10.1080/1350486X.2021.1893770
Authors
- Publisher:
- Taylor and Francis
- Journal:
- Applied Mathematical Finance More from this journal
- Volume:
- 27
- Issue:
- 6
- Pages:
- 520-548
- Publication date:
- 2021-05-18
- Acceptance date:
- 2021-02-11
- DOI:
- EISSN:
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1466-4313
- ISSN:
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1350-486X
- Language:
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English
- Keywords:
- Pubs id:
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1163720
- Local pid:
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pubs:1163720
- Deposit date:
-
2021-02-27
Terms of use
- Copyright holder:
- Informa UK
- Copyright date:
- 2021
- Rights statement:
- © 2021 Informa UK Limited, trading as Taylor & Francis Group
- Notes:
- This is the accepted manuscript version of the article. The final version is available online from Taylor & Francis at: https://doi.org/10.1080/1350486X.2021.1893770
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