Best Paper - Volume 17

The JFI editors are pleased to announce that the JFI Stuart Greenbaum Prize for the most significant paper published in the 2008 Journal of Financial Intermediation has gone to Antonio Nicoḷ and Loriana Pelizzon for the paper "Credit Derivatives, Capital Requirements and Opaque OTC Markets," published in Volume 17, Issue 4. The prize carries with it a $2,500 check for the winners.

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Credit Derivatives, Capital Requirements and Opaque OTC Markets
Antonio Nicoḷ
University of Pauda, Italy

Loriana Pelizzonl
University of Venice, Italy

Abstract

In this paper we study the optimal design of credit derivative contracts when banks have private information about their ability in the loan market and are subject to capital requirements. First, we prove that when banks are subject to a maximum loss capital requirement the optimal signaling contract is a binary credit default basket. Second, we show that if credit derivative markets are opaque then banks cannot commit to terminal-date risk exposure, and therefore the optimal signaling contract is more costly. The above results allow us to discuss the potential implications of different capital adequacy rules for the credit derivative markets. JEL Classification Numbers: G21; D82. ©2008 Elsevier Inc.