2013/02/19 by Chris Kenyon, Andrew Green, Kenyon, Chris +1
Business, Management and Accounting · Economics, Econometrics and Finance · #91B30 #91B55 #91B74 #91G20 #91G40 #91G50 #Banking stability, regulation, efficiency #Credit Risk and Financial Regulations #FOS: Economics and business #Financial Distress and Bankruptcy Prediction #General Finance (q-fin.GN) #Risk Management (q-fin.RM) #msc:91B30 #msc:91B55 #msc:91B74 #msc:91G20 #msc:91G40 #msc:91G50 #q-fin.GN #q-fin.RM
paper · pdf · doi:10.48550/arxiv.1302.4595
12 pages; 5 figures
arxiv created 2013/02/19 · openalex publication_date 2013/02/19 · arxiv updated 2013/02/20 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
Changes in collateralization have been implicated in significant default (or near-default) events during the financial crisis, most notably with AIG. We have developed a framework for quantifying this effect based on moving between Merton-type and Black-Cox-type structural default models. Our framework leads to a single equation that emcompasses the range of possibilities, including collateralization remargining frequency (i.e. discrete observations). We show that increases in collateralization, by exposing entities to daily mark-to-market volatility, enhance default probability. This quantifies the well-known problem with collateral triggers. Furthermore our model can be used to quantify the degree to which central counterparties, whilst removing credit risk transmission, systematically increase default risk.