Journal of Applied Finance & Banking

Modelling Haircuts: Evidence from NYSE Stocks

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  • 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