Risk-sharing or risk-taking? Counterparty-risk, incentives and margins

Biais, Bruno, Heider, Florian and Hoerova, Marie (2016) Risk-sharing or risk-taking? Counterparty-risk, incentives and margins. Journal of Finance, 71 (4). pp. 1669-1698.

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Official URL: http://tse-fr.eu/pub/29636


Derivatives activity, motivated by risk-sharing, can breed risk taking. Bad news about the risk of the asset underlying the derivative increases the expected liability of a protection seller and undermines her risk prevention incentives. This limits risk-sharing, and may create endogenous counterparty risk and contagion from news about the hedged risk to the balance sheet of protection sellers. Margin calls after bad news can improve protection sellers incentives and enhance the ability to share risk. Central clearing can provide insurance against counterparty risk but must be designed to preserve risk-prevention incentives.

Item Type: Article
Language: English
Date: August 2016
Refereed: Yes
Uncontrolled Keywords: Hedging, Insurance, Derivatives, Moral hazard, Risk management, Counterparty risk, Contagion, Central clearing, Margin requirements
JEL codes: D82 - Asymmetric and Private Information
G21 - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
G22 - Insurance; Insurance Companies
Divisions: TSM Research (Toulouse), TSE-R (Toulouse)
Site: UT1
Date Deposited: 02 Oct 2015 13:40
Last Modified: 07 Mar 2018 13:23
OAI ID: oai:tse-fr.eu:29636
URI: http://publications.ut-capitole.fr/id/eprint/18479

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