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Financial Markets and Portfolio Management

, Volume 30, Issue 4, pp 397–426 | Cite as

Assessing financial distress dependencies in OTC markets: a new approach using trade repositories data

  • Michele Bonollo
  • Irene Crimaldi
  • Andrea Flori
  • Laura GianfagnaEmail author
  • Fabio Pammolli
Article
  • 252 Downloads

Abstract

In this paper, we study the relationships among financial market sub-segments as a way to identify potential financial distress through increased co-movements among them. To study how sub-markets are mutually co-dependent, we combine granular data on over-the-counter derivatives by trade repositories and the joint probability of distress (JPoD) approach introduced by the International Monetary Fund. We define an indicator that combines several distress drivers and observe that results on co-dependencies are similar to those that would be expected: similarities between financial and contractual terms seem to be responsible for stronger co-movements among sub-markets. However, high values for JPoD even in correspondence of quite dissimilar sub-markets suggest the presence of other drivers that should be investigated in future research. To the best of our knowledge, this is the first empirical study on systemic risk assessment based on micro-founded trade repositories’ data on interest rate swaps.

Keywords

Financial distress interdependence Joint probability of distress Interest rate swaps Systemic risk Micro-founded trade repositories’ data 

JEL Classification

G01 G18 G19 

Notes

Acknowledgements

The authors are grateful for financial support from Consiglio Nazionale delle Ricerche—Programma Nazionale della Ricerca, Project CRISIS Lab. They are also thankful for the very valuable comments, which greatly improved the paper, made by the Editor and the anonymous referee. They thank Iason Ltd for making the dataset available. Special thanks go to A. Castagna for his precious collaboration. The usual disclaimer applies.

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Copyright information

© Swiss Society for Financial Market Research 2016

Authors and Affiliations

  • Michele Bonollo
    • 1
  • Irene Crimaldi
    • 2
  • Andrea Flori
    • 2
  • Laura Gianfagna
    • 2
    Email author
  • Fabio Pammolli
    • 2
  1. 1.Iason LtdMilanItaly
  2. 2.IMT School for Advanced Studies LuccaLuccaItaly

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