Journal of Financial Economics Vol. 136 No. 1 2020

OTC premia

Gino Cenedese¹; Angelo Ranaldo^2,3; Michalis Vasios⁴

¹ Marble Arch Medical Centre · ² University of St.Gallen · ³ Swiss Finance Institute · ⁴ Bank of England

Abstract

Using unique data at transaction and identity levels, we provide the first systematic study of interest rate swaps traded over the counter (OTC). We find substantial and persistent heterogeneity in derivative prices consistent with a pass-through of regulatory costs on to market prices via so-called valuation adjustments (XVA). A client pays a higher price to buy interest rate protection from a dealer (i.e., the client pays a higher fixed rate) if the contract is not cleared via a central counterparty. This OTC premium decreases by posting initial margins and with higher buyer’s creditworthiness. OTC premia are absent for dealers suggesting bargaining power.

DOI

10.1016/j.jfineco.2019.09.010

Volume

136

Issue

1

Pages

86-105

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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