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Financial Crises and Transmission of Shocks

Paper Session

Sunday, Jan. 5, 2020 1:00 PM - 3:00 PM (PDT)

Manchester Grand Hyatt, Seaport C
Hosted By: American Finance Association
  • Chair: Tyler Muir, University of California-Los Angeles

The Collateral Rule: An Empirical Analysis of the CDS Market

Agostino Capponi
,
Columbia University
Allen Cheng
,
Columbia University
Stefano Giglio
,
Yale University
Richard Haynes
,
Commodity Futures Trading Commission

Abstract

We explore a novel dataset of daily cleared credit default swap (CDS) positions along with the posted margins to study how collateral vary with portfolio risks and market conditions.
Contrary to many theoretical models, which assume collateral constraints to follow Value-at-Risk rules, we find strong evidence that collateral requirements are set an order of magnitude larger than what standard Value-at-Risk rules imply. The panel variation in collateralization rates of CDS portfolios (over time and across participants) is well explained by measures of extreme tail risks, related to the maximal potential loss of the portfolio. We develop a model of endogenous collateral in CDS markets to interpret these empirical findings. The model predicts that the conservativeness of collateral levels can be explained through disagreement of market participants about the extreme states of the world, in which CDSs pay off and counterparties default.

Public Liquidity and Financial Crises

Wenhao Li
,
University of Southern California

Abstract

What are the impacts of public liquidity, including government bonds and bank reserves, on asset prices and economic output? I build a general equilibrium model that features the liquidity insurance channel --- banks demand public liquidity as insurance against liquidation losses during banking crises. Larger public liquidity supply reduces the cost of liquidity insurance and makes banks more willing to hold illiquid assets and lend to firms. The liquidity insurance mechanism is supported by the data: the calibrated model explains 42% of the monthly variations in the liquidity premium. The model traces the impact of public liquidity on output, through the connection between the liquidity premium and bank lending. Counterfactual analyses reveal that both liquidity premium and output are more responsive to liquidity expansions of QE1 than expansions of QE3, partially due to declining marginal benefit of liquidity expansions, but largely due to differences in bank equity.

Dollar Exchange Rate as a Credit Supply Channel: Evidence from Firm-Level Exports

Valentina Bruno
,
American University
Hyun Song Shin
,
Bank for International Settlements

Abstract

The dollar exchange rate affects real outcomes not only through competitiveness, but also through fluctuations in credit supply. Using detailed export data at the firm-level, we find that the dollar exchange rate affects exports and, conditional on the firms' and banks' financing structure, operates in the opposite direction to the competitiveness channel. Other things equal, firms that are more reliant on banks with higher dollar funding suffer a larger negative effect on exports following an appreciation of the dollar. The effect is particularly pronounced for firms with long production chains. We identify a financial channel of the dollar exchange rate operating through bank credit supply to the exporting firm.
Discussant(s)
Georgy Chabakauri
,
London School of Economics
Moritz Lenel
,
Princeton University
Zhengyang Jiang
,
Northwestern University
Matthew Plosser
,
Federal Reserve Bank of New York
JEL Classifications
  • G2 - Financial Institutions and Services