Research and Policy

Research and Policy Interests:
Financial Market Infrastructures, Systemic Risk, Financial Markets, Banking,   with the emphasis on  Derivatives, CCPs, Repo Clearing, Shortened Settlement Cycles, Defi/DLT, Cross-border Payments, CCP Recovery & Resolution, System-wide Stress Testing, Market Risk, Credit Risk, Model Risk, Climate Risk, Liquidity, Procyclicality, Fire sales, Interconnectedness, Contagion, Amplification Mechanisms, Endogenous Risk, Agent-Based Modelling, Financial Fragility/Crises,  with the aim to contribute to  Financial Stability & Regulation, Macro-prudential Policy, Quantitative Risk Management.

Work in Progress

Odabasioglu, A., Rodrigo, H., "Margin procyclicality metrics design for Central Counterparties."

Anderson, R., Odabasioglu, A., "Systemic Risk Assessment of Major Trading Groups in Interest Rate Derivatives."
EMIR Bridge Programme (Trade Repository Derivatives Dataset*)

Working Papers

Odabasioglu, A. (2023), "Procyclicality in Central Counterparty Margin Models: A Conceptual Tool Kit and the Key Parameters."
Bank of Canada - Staff Discussion Paper No. 2023-34 

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Central counterparty (CCP) initial margin models are procyclical by nature, and CCPs use anti-procyclicality (APC) tools to mitigate this. However, despite the widespread use of such tools, margin models of CCPs around the world reacted severely to the heightened volatility during the March 2020 market turmoil. This triggered a debate globally on the adequacy of APC tools. We offer potential explanations for why those tools were not sufficient. We highlight that, to effectively mitigate procyclicality, the focus should be on the key parameters for both the margin model and the APC tools. One widely adopted APC tool established by the European Market Infrastructure Regulation is the stress period. We show that, to mitigate procyclicality with this tool, the main focus should not be on the calibration of its stressed margin level, but rather on the weight used to add this to the margin model. Further, the stress period tool can be highly effective, but only when its weight parameter is calibrated adequately high. These insights are essential for regulators to provide effective guidance on margin procyclicality, and for CCPs to appropriately design and calibrate their margin systems and procyclicality frameworks. To further serve these needs, we provide a novel conceptual tool kit for regulators and CCPs. The tool kit allows them to see a margin system’s performance in procyclicality as well as in other competing objectives—such as margin coverage and cost of collateral—all in one place and for any combination of calibrations of the key procyclicality parameters. This feature lets regulators set outcomes-based procyclicality targets achievable by CCP margin models and APC tools. Moreover, it helps regulators design prescriptive procyclicality guidance in line with these desired outcomes-based targets. CCPs can use the tool kit to determine the set of parameter calibrations that satisfy the required procyclicality targets and perform sufficiently well in the other competing objectives.

Gibson, R. and Odabasioglu, A. (2021), "Banks' Lobbying Determinants: Insights from the GFC and the Trump Presidency."
European Corporate Governance Institute – Finance Working Paper No. 784/2021 

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This study examines the relationship between banks' main financial and business characteristics and their lobbying intensity during the last two decades. A novel feature of our analysis is that we adopt a network perspective to measure banks' lobbying intensity. We find that banks are more likely to lobby when they are larger, less creditworthy, venture into non-traditional businesses and face higher agency conflicts. Next, we observe that subsequent to the GFC and with the announcement of the Dodd-Frank bill, there was a significant increase in lobbying undertaken by banks with higher revenues stemming from trading and securitization. Finally, during the Trump Presidency, banks with higher trading revenues lobbied significantly more.

Odabasioglu, A. (2018), "Informed Trading Uncertainty, Amplification Mechanisms and Persistent Price Deviations."

This paper belongs to the line of research stemming from my interest in understanding how frictions and financial institutions influence the price formation process, liquidity and the way financial markets function, with emphasis on financial stability and regulation. It provides a generalized, rational framework and analyzes non-fundamental asset price deviations (anomalies) and their evolution (their directions, magnitudes and persistence), and it proposes a parsimonious, information-based explanation for them when traders are exposed to forced-trades (e.g. fire-sales, fire-purchases). I do so within an information-setting that allows a second dimension of uncertainty (in the fraction of forced-trades, in addition to the one in the asset value). When the forced-trades cannot be well differentiated from the trades that are actually associated with the change in the asset's fundamentals, we observe (even when a fundamental reason is absent) price deviations. The model predicts under-(over-) shooting in the prices when the fraction of unobserved fire-sales is initially under-(over-) estimated by the market maker. When the constrained traders are the informed traders, further price deviations are observed due to an information-based amplification mechanism, and the price deviations can persist, as opposed to reversal (correction). In that way, this paper aims to explain persistent price deviations (e.g. crashes) following high-leverage periods, by dynamically modeling the mechanism producing the forced-trades via margin trading, where margin calls arise due to adverse price changes. Since (potentially system-wide) destabilizing financial positive feedback mechanisms and endogenous shocks, both of which are components of the systemic risk, are involved in the problem I analyze, I also discuss policy issues that could improve the financial stability in the markets by mitigating the destabilizing effects of forced trades.

Odabasioglu, A., Uthemann, A. (2016), "Taxing Financial Transactions as a Policy Instrument: Implications for Market Quality."

This paper examines the highly topical European Financial Transaction Taxation debate from the standpoint of market microstructure & systemic risk literatures. It is intended to provide an assessment of the suitability of financial transaction tax (FTT) as a policy tool, especially by means of its impact on market quality; aspects such as volatility, liquidity, informational efficiency and price discovery are the main interests. First, it lays out the theoretical arguments that are brought forward to justify the use of transaction tax as a corrective tool, for instance, curbing short-term speculation conducted by high-frequency traders. Then, it extends the list of externalities at which such an intervention could be targeted, and discusses also alternative policy instruments. Next, it provides an overview of the empirical evidence on the impact of transaction tax on market quality. Then, it considers concrete design questions that have to be addressed, should one attempt to implement an FTT; these include market maker exemptions and tax avoidance possibilities. Furthermore, it draws attention to the difficulty in designing the taxation of derivatives, and points out that, the introduction of financial transaction tax could result in systemic risks to build-up, for instance, by incentivizing participants to replace the financial instruments subject to the tax with the untaxed ones (in the spirit of regulatory arbitrage) at a market-wide level. Finally, the paper concludes with an illustration of these difficulties using the proposal for a harmonized European FTT as an example.

Odabasioglu, A. (2016), "Managerial Strategic Investment with Agency and Competition in a Real Options Framework."

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This paper examines the investment behavior of a managerial firm facing competition by developing an investment timing model within the real option exercise game framework under incomplete information. The particular research question of concern is whether the competition serves as an incentive mechanism for the agency problem. Product market competition is modeled in a full preemption fashion in the sense that the first mover captures the whole market and the second mover's option to invest becomes worthless. The delegation of investment decision to a manager creates an agency conflict since the true quality of the underlying project is observed privately by the manager which gives her the scope for diverting part of the cash flows for private benefits. Thus, an optimal contract has to be designed which induces the agent to truthfully reveal the project's quality and exercise the option at a strategically optimal trigger level. The results indicate that while competition tends to induce (over-) early-investment for both types of the project, the agency problem calls for delaying the investment for the low quality project, with the overall effect being dependent on the relative importance of preemption threat to the agency conflict. Accordingly, the existence of preemption threat can mitigate the (social) inefficiency stemming from agency conflict for the low quality project. Furthermore, competition provides additional incentives to the manager for truth-telling and as a result allows the owner to provide less (informational) rents to the manager. Finally, allowing for positive correlation between the competing firms' underlying project values has two consequences: First, while the amount of investment timing adjustment required due to competition decreases for the low quality project, the same increases for the high quality project. Second, the presence of correlation supplies (also) additional incentives to the manager for truth-telling and it suppresses the distortion in the low quality project's exercising trigger that originally stems from the agency problem.

*EMIR Trade Repository Derivatives Dataset is a collection of highly granular data which the European Systemic Risk Board (ESRB) has been gathering via European Securities and Markets Authority (ESMA) and trade repositories (including DTCC, Unavista, CME) under the European Market Infrastructure Regulation (EMIR). It covers the details of every new and outstanding over-the-counter (OTC) and exchange-traded derivatives transactions made by all the counterparties resident in the EU (including with non-EU counterparties), with each transaction record possessing unique coded counterparty identifiers (LEIs) on it. This data has been very recently allowing researchers to draw a first complete picture of the EU derivatives market and to have positive impact on the macro-prudential policy measures influenced by the ESRB.