Market structure, counterparty risk and systematic risk
Dale W.R Rosenthal – University of Illinois Chicago

I consider derivatives counterparties in financial networks where every counterparty is connected to one another versus networks where counterparties are only connected via central clearing. I show that a counterparty bankruptcy affects these markets differently: fully-connected markets have more follow-on bankruptcies (contagion) and volatility than markets with central clearing. Furthermore, counterparties in fully-connected markets may (rationally) trade to cause the maximum distress — while the coordination of trading by a central clearinghouse eliminates this possibility.


Dale W.R Rosenthal

Professor Rosenthal started in finance as a intern for listed equities at Goldman Sachs. He worked for Long-Term Capital Management as an equity derivatives strategist from 1995 to 2000. From 2000-2003, he was a quantitative researcher and proprietary trader at Morgan Stanley’s Equity Trading Lab (one of the first algorithmic trading groups). His academic research focuses on trading and financial distress using market microstructure and financial econometrics; he has also studied delays in financial phenomena. Professor Rosenthal graduated from Cornell University with a B.S. in electrical engineering and the University of Chicago with a Ph.D. in statistics. To know more…

 


“I study extreme events because they can cause painful permanent changes. My research seeks to identify when extreme events are more likely and if we can make those extremes less painful. Put simply: If we cannot stop a crisis, can it be be a better crisis?”

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