Haircutting non-cash collateral

Wujiang Lou develops a parametric haircut model to conduct sensitivity tests and capture market liquidity risk

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Value-at-risk-based, data-driven haircut models are subject to data quality issues and lack flexibility for further analysis. Wujiang Lou develops a complementary parametric haircut model to conduct sensitivity tests, capture market liquidity risk, allow idiosyncratic risk adjustments and incorporate relevant market information. Computational results show potential uses in designing collateral haircuts for collateral agreements, such as credit support annexes, and in