Liquidity and Fragility in OTC Credit Derivatives Markets

Pierre-Olivier Weill, Andrea Eisfeldt and Andrew Atkeson

No 1058, 2012 Meeting Papers from Society for Economic Dynamics

Abstract: This paper develops a search and matching model of an over-the-counter market for credit derivatives. In equilibrium, the large volume of bilateral trade creates a network of credit exposures in which banks are linked together by a complex liability structure, with gross credit exposures that can greatly exceed net credit exposures. Our results shed light on the impact of the market structure on trading outcomes, including the allocation of risk, the level and distribution of prices and trading profits, and the systemic importance of banks.

Date: 2012
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