Biais, Bruno, Heider, Florian and Hoerova, Marie (2012) Clearing, counterparty risk and aggregate risk. IMF Economic Review (n°60). pp. 193-222.

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Identification Number : 10.1057/imfer.2012.8


The paper studies the optimal design of clearing systems. The paper analyzes how counterparty risk should be allocated, whether traders should be fully insured against that risk, and how moral hazard affects the optimal allocation of risk. The main advantage of centralized clearing, as opposed to no or decentralized clearing, is the mutualization of risk. While mutualization fully insures idiosyncratic risk, it cannot provide insurance against aggregate risk. When the latter is significant, it is efficient that protection buyers exert effort to find robust counterparties, whose low default risk makes it possible for the clearing system to withstand aggregate shocks. When this effort is unobservable, incentive compatibility requires that protection buyers retain some exposure to counterparty risk even with centralized clearing.

Item Type: Article
Language: English
Date: July 2012
Refereed: Yes
Uncontrolled Keywords: Risk-sharing, Moral hazard, Optimal contracting, Counterparty risk, Central Clearing Counterparty, Mutualization, Aggregate and idiosyncratic risk
JEL Classification: D82 - Asymmetric and Private Information
G22 - Insurance; Insurance Companies
G28 - Government Policy and Regulation
Divisions: TSE-R (Toulouse), TSM Research (Toulouse)
Site: UT1
Date Deposited: 09 Jul 2014 17:41
Last Modified: 02 Apr 2021 15:48
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