The impact of economic shocks on assets and their derivatives

Abstract

In this dissertation, we investigate dealers that securitize assets into derivatives. These assets are both a means of generating derivatives as well as a source of collateral for interbank borrowing. The main result quantifies the effects of temporary shocks on asset price and input, derivative price and output as well as profit. For instance, we show how a change in profit subsequent to a negative shock is influenced by bank features such as asset rates, derivatives rates and liquidity. We will further establish the probability of CDS defaults using Monte Carlo simulation. Finally, we present an example that characterizes amplification and persistence effects from shocks on asset and derivative prices.