2023/10/04 by Dorinel Bastide, Bastide, Dorinel, Stéphane Crépey +5
Economics, Econometrics and Finance · #Banking stability, regulation, efficiency #Economic theories and models #FOS: Economics and business #Risk Management (q-fin.RM) #Stochastic processes and financial applications
paper · doi:10.48550/arxiv.2310.02608
openalex publication_date 2023/10/04 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
For vanilla derivatives that constitute the bulk of investment banks' hedging portfolios, central clearing through central counterparties (CCPs) has become hegemonic. A key mandate of a CCP is to provide an efficient and proper clearing member default resolution procedure. When a clearing member defaults, the CCP can hedge and auction or liquidate its positions. The counterparty credit risk cost of auctioning has been analyzed in terms of XVA metrics in Bastide, Crépey, Drapeau, and Tadese (2023). In this work we assess the costs of hedging or liquidating. This is done by comparing pre- and post-default market equilibria, using a Radner equilibrium approach for portfolio allocation and price discovery in each case. We show that the Radner equilibria uniquely exist and we provide both analytical and numerical solutions for the latter in elliptically distributed markets. Using such tools, a CCP could decide rationally on which market to hedge and auction or liquidate defaulted portfolios.