tailieunhanh - Modelling haircuts: Evidence from NYSE stocks

This study aims to model lenders’ haircut decision specifically for stocks. The mathematical model showed that lenders face a trade-off between profit and risk exposure in a secured loan; consequently, haircuts are determined in the solvency as a stochastic variable. It was assumed coherently to industry practice that lenders use parametric VaR for collateral valuation. In this model, lenders’ probability selection in the VaR approach indicates their risk tolerance, which was captured through to asset liquidity and market volatility expectations. The model implementation on NYSE domestic stocks showed that stocks’ haircuts have similar classification pattern with asset liquidity. | Journal of Applied Finance Banking vol. 8 no. 4 2018 79-106 ISSN 1792-6580 print version 1792-6599 online Scienpress Ltd 2018 Modelling Haircuts Evidence from NYSE Stocks Mehmet Benturk1 and Marshall J. Burak1 Abstract This study aims to model lenders haircut decision specifically for stocks. The mathematical model showed that lenders face a trade-off between profit and risk exposure in a secured loan consequently haircuts are determined in the solvency as a stochastic variable. It was assumed coherently to industry practice that lenders use parametric VaR for collateral valuation. In this model lenders probability selection in the VaR approach indicates their risk tolerance which was captured through to asset liquidity and market volatility expectations. The model implementation on NYSE domestic stocks showed that stocks haircuts have similar classification pattern with asset liquidity. JEL classification numbers G21 Keywords Asset haircuts VaR collateral valuation collateral constraint 1. Introduction The aftermath of the 2008 financial crisis inclined academia finance industry and financial regulatory institutions to place more importance on leverage and asset liquidity2. Different than other financial crisis we have seen in last couple decades the 2008 financial crisis had started in the debt market and infected to the equity 1 Lincoln University US 2 See for example Acharya Viswanathan 2010 Acharya Gale Yorulmazer 2011 Adrian Boyarchenko 2012 Adrian Shin 2010 Bruce Kenneth 2013 Brunnermeier Pedersen 2009 Cao 2008 Cipriani Fostel Houser 2013 Cornett McNutt Strahan Tehranian 2011 Fostel Geanakoplos 2008 Fostel Geanakoplos 2012 Fostel Geanakoplos 2014 Garleanu Pedersen 2011 Geanakoplos 2010 Kahraman Tookes 2015 Longworth 2010 Schularic Taylork 2012 Simsek 2013 Thornton 2009 Tobias Moench Shin 2013 among many others. Article Info Received February 8 2018. Revised March 5 2018 Published online July 1 2018 80 Mehmet Benturk Marshall J. Burak market almost a year .