Research articles for the 2019-02-19

A New Nonparametric Estimate of the Risk-Neutral Density with Applications to Variance Swaps
Liyuan Jiang,Shuang Zhou,Keren Li,Fangfang Wang,Jie Yang

We develop a new nonparametric approach for estimating the risk-neutral density of asset prices and reformulate its estimation into a double-constrained optimization problem. We evaluate our approach using the S\&P 500 market option prices from 1996 to 2015. A comprehensive cross-validation study shows that our approach outperforms the existing nonparametric quartic B-spline and cubic spline methods, as well as the parametric method based on the Normal Inverse Gaussian distribution. As an application, we use the proposed density estimator to price long-term variance swaps, and the model-implied prices match reasonably well with those of the variance future downloaded from the CBOE website.

Auditors are Known by the Companies They Keep
Cook, Jonathan Aaron,Johnstone, Karla M.,Kowaleski, Zachary T,Minnis, Michael,Sutherland, Andrew
We study the role of client reputation in auditor-client matching. Using 1.2 million employment records from US broker-dealers, we find that broker-dealer clients of the same auditor have very similar financial adviser misconduct profiles. Misconduct is approximately half as important as client size in explaining auditor-client matches, and misconduct unrelated to misreporting or fraud risk is relevant to this matching. We link these matching patterns to auditors’ heterogeneous preferences for client reputation. An auditor’s track record for accepting high misconduct clients predicts future client misconduct, even after controlling for the client’s misconduct record and characteristics. Additional results reveal that auditor-client reputation matching is widespread and generalizable to firms outside the investment industry. We interpret our results within a positive assortative matching framework, and conclude that auditors’ differential reputation concerns relate to their client acceptance and continuance decisions.

Brexit and Uncertainty: insights from the Decision Maker Panel
Bloom, Nicholas,Bunn, Philip,Chen, Scarlett,Mizen, Paul,Smietanka, Pawel,Thwaites, Gregory,Young, Garry
The UK’s decision to leave the EU in the 2016 referendum created substantial uncertainty for UK businesses. The nature of this uncertainty is different from that of a typical uncertainty shock because of its length, breadth and political complexity. Consequently, a new firm-level survey, the Decision Maker Panel (DMP), was created to investigate this, finding three key results. First, Brexit was reported to be one of the top three sources of uncertainty for around 40% of UK businesses in the two years after the vote in June 2016 referendum. This proportion increased further in Autumn 2018. Hence, Brexit provided both a major and persistent uncertainty shock. Second, uncertainty has been higher in industries that are more dependent on trade with the EU and on EU migrant labour. Third, the uncertainties around Brexit have been primarily about the impact on businesses over the longer term rather than shorter term, including uncertainty about the timing of any transition arrangements and around the nature of Brexit.

Challenges and Opportunities Associate with Financial Technology in the 21st Century
Moshirian, Fariborz,Susantono, Bambang,Yu, Richard
The purpose of this paper is to discuss the issues associated with financial technologies. The paper discusses issues such as drivers of fintech, shortcomings of traditional financial services and the role of technological advancement. The paper also discusses issues associated with fintech investment and disruption. It refers to fintech challenges, including investment management, customer management and regulation. The paper discusses the development of fintech in Asia and its potential in the Asia Pacific region.

Credit Ratings and Structured Finance
Josephson, Jens,Shapiro, Joel D.
The poor performance of credit ratings of structured finance products in the financial crisis has prompted investigation into the role of credit rating agencies (CRAs) in designing and marketing these products. We analyze a two-period reputation model in which a CRA both designs and rates securities that are sold both to investors who are constrained to purchase highly rated securities and investors who are unconstrained. Assets are pooled and senior and junior tranches are issued with a waterfall structure. When the rating constraint is lax, the CRA will include only risky assets in the securitization pool, serving both types of investors without any rating inflation. Rating inflation is decreasing in the tightness of the rating constraint locally. But rating inflation may be non-monotonic in the rating constraint globally, with no rating inflation when the constraint is lax or tight.

Currency Mispricing and Dealer Balance Sheets
Cenedese, Gino,Della Corte, Pasquale ,Wang, Tianyu
We relate currency mispricing originating from the breakdown of covered interest rate parity to the dealer balance-sheet constraints resulting from the post-crisis financial regulation. Using a unique data set on contract-level foreign exchange derivatives with disclosed counterparty identities, we find that dealers with a higher leverage ratio demand an additional premium from their clients for synthetic dollar funding. We handle endogeneity using two exogenous variations associated with the public disclosure of the leverage ratio, and the introduction of the UK leverage ratio framework while controlling for changes in demand conditions at the client level.

Debt Overhang, Rollover Risk, and Corporate Investment: Evidence from the European Crisis
Kalemli-Ozcan, Sebnem,Laeven, Luc,Moreno, David
We quantify the role of financial factors behind the sluggish post-crisis performance of European firms. We use a firm-bank-sovereign matched database to identify separate roles for firm and bank balance sheet weaknesses arising from changes in sovereign risk and aggregate demand conditions. We find that firms with higher debt levels and a higher share of short-term debt reduce their investment more after the crisis. This negative effect is stronger for firms linked to weak banks with exposures to sovereign risk, signifying increased rollover risk. These financial channels explain about 60% of the decline in aggregate corporate investment.

Dynamic Jump Intensities in Crude Oil Futures and Options Markets
Christoffersen, Peter,Jacobs, Kris,Li, Bingxin
Options on crude oil futures are the most actively traded commodity options. We develop a class of computationally efficient discrete-time jump models that allow for closed-form option valuation, and we use crude oil futures and options data to investigate the economic importance of jumps and dynamic jump intensities in these markets. Allowing for jumps is crucial for modeling crude oil futures and futures options, and we find evidence in favor of time-varying jump intensities. During crisis periods, jumps occur more frequently. The properties of the jump processes implied by the option data differ from those implied by the futures data, which may be due to improved parameter identification.

Forward Trading and Collusion in Supply Functions
Wölfing, Nikolas M.
This paper studies the effect of forward contracts on the stability of collusion among firms, competing in supply functions on the spot market. A forward market can increase the range of discount factors which allow to sustain collusion. On the contrary, collusion is destabilised when a potential deviator sells a significant amount forward. Results do not depend on the type (financial or physical) of contract fulfilment and are robust to different levels of demand uncertainty. As a policy implication, the study finds that liquid and anonymous forward markets are incompatible with collusion.

Genisys or Skynet? An Empirical and Theoretical View of Blockchain Enabled Corporate Governance and Accounting
Jayasuriya, Dulani,Sims, Alexandra
There is considerable hype about blockchain in almost every industry including finance and significant investments globally. We explore the effects of blockchain applications in corporate governance and accounting. Would such use be efficient? Would the financial services industry be fundamentally changed by this technology? This study evaluates blockchain technology, investment in blockchain, applications, impact on stakeholders. Provides a behavioral, legal, ethical and developer’s perspective of blockchain technology adoption in accounting and corporate governance. Moreover, we compile a unique database of blockchain investments and conduct an empirical analysis of investments in blockchains and related start-ups. Finally, we discuss future research on blockchain for wider adoptions in financial markets.

Global labor flow network reveals the hierarchical organization and dynamics of geo-industrial clusters in the world economy
Jaehyuk Park,Ian Wood,Elise Jing,Azadeh Nematzadeh,Souvik Ghosh,Michael Conover,Yong-Yeol Ahn

Groups of firms often achieve a competitive advantage through the formation of geo-industrial clusters. Although many exemplary clusters, such as Hollywood or Silicon Valley, have been frequently studied, systematic approaches to identify and analyze the hierarchical structure of the geo-industrial clusters at the global scale are rare. In this work, we use LinkedIn's employment histories of more than 500 million users over 25 years to construct a labor flow network of over 4 million firms across the world and apply a recursive network community detection algorithm to reveal the hierarchical structure of geo-industrial clusters. We show that the resulting geo-industrial clusters exhibit a stronger association between the influx of educated-workers and financial performance, compared to existing aggregation units. Furthermore, our additional analysis of the skill sets of educated-workers supplements the relationship between the labor flow of educated-workers and productivity growth. We argue that geo-industrial clusters defined by labor flow provide better insights into the growth and the decline of the economy than other common economic units.

Government Support and Bank Wholesale Funding Costs: Evidence from the EU Banking Union
d'Udekem, Benoit,Audenrode, Marc Van
In the wake of the financial crisis, many governments intervened to rescue banks. Between 2007 and 2009, 194 State Aid schemes were notified to the European Commission by different member states; only 11 were blocked. Recently, the Commission set out stringent rules to allow State’s intervention in banking systems, out of fear that state aid may distort banking markets. We investigate whether this fear is warranted by assessing if State Aid interferes with bank funding. Using an original database of over 2,500 senior bonds issued by 70 significant European banks we find that nationalized institutions do not finance themselves more cheaply than privately-owned banks.

Improving Bargaining Power or Putting Safety First? Ownership Structure and the Effect of Labor Market Regulation on Leverage
Kononova, Marina,Rapp, Marc Steffen,Udoieva, Iuliia
While previous work suggests two competing explanations for the effect of labor market regulation on firms’ demand for debt, our results reconcile both the “strategic use of debt” and “financial flexibility” view. Exploiting staggered changes to labor laws in 28 OECD countries, we find that the average causal effect of employment protection on firm financial leverage is close to zero but hides much heterogeneity depending on firm ownership structure. We posit that a regulatory-induced increase in labor power (i) gives a firm a strategic incentive to raise more debt, but also (ii) increases operating leverage and the risk of financial distress that could encourage firms with poorly diversified blockholders to react with a more conservative financial policy compared to widely-held firms. Examining non-financial, non-utility listed firms over a 20-year period, we find that higher ownership concentration mitigates the positive effect of labor power on financial leverage, making the relationship less positive or more negative. This result does not seem to be driven by pretreatment differences among firms and is robust against a wide variety of tests. Our results highlight the importance of considering ownership structure in studying firms’ capital structure decisions.

Land of the Falling 'Poison' Pill: A Comparative and Empirical Analysis of Japan’s Defensive Measures
Koh, Alan K.,Nakahigashi, Masafumi,Puchniak, Dan W.
Embraced by US managers in the 1980s as a lifeline in a sea of hostile takeovers, the poison pill fundamentally altered the trajectory of American corporate governance. When a hostile takeover wave seemed imminent in Japan in the mid-2000s, Japanese boards appeared to embrace this American invention with equal enthusiasm. Japan’s experience should have been a ringing endorsement for the utility of American corporate governance solutions in foreign jurisdictions â€" but it was not to be. Japan’s unique interpretation of the “poison pill” that was so eagerly adopted by Japanese companies in the mid- to late-2000s has turned out to be nothing like their potent American namesakes â€" and, in fact, the opposite of what would be expected by leading US academics who have built a cottage industry publishing on the US poison pill. Based on hand collected empirical data, we provide the first in-depth analysis for why Japan’s “poison pill” (defensive measures) is heading towards extinction â€" a watershed reversal that is unexplained in the Japanese literature and has almost entirely escaped the English language literature. By drawing on our hand collected data, case studies, and Japanese jurisprudence, we illuminate the unique and untold story of how one of the most discussed mechanisms of American corporate governance has worked almost entirely differently when transplanted to Japanese soil â€" the importance of which is heightened as Japan is by far the largest economy in which the poison pill has been tested outside of the United States. In addition, our analysis sheds light on the unexpected importance of Japan’s recently implemented corporate governance code and stewardship code â€" two Western legal transplants that have garnered considerable attention in the English language literature, but which have yet to be evaluated in light of their impact on defensive measures in Japan.

Market Impact: A Systematic Study of Limit Orders
Emilio Said,Ahmed Bel Hadj Ayed,Alexandre Husson,Frédéric Abergel

This paper is devoted to the important yet little explored subject of the market impact of limit orders. Our analysis is based on a proprietary database of metaorders - large orders that are split into smaller pieces before being sent to the market. We first address the case of aggressive limit orders and then, that of passive limit orders. In both cases, we provide empirical evidence of a power law behaviour for the temporary market impact. The relaxation of the price following the end of the metaorder is also studied, and the long-term impact is shown to stabilize at a level of approximately two-thirds of the maximum impact. Finally, a fair pricing condition during the life cycle of the metaorders is empirically validated.

Market Impact: A Systematic Study of the High Frequency Options Market
Emilio Said,Ahmed Bel Hadj Ayed,Damien Thillou,Jean-Jacques Rabeyrin,Frédéric Abergel

This paper deals with a fundamental subject that has seldom been addressed in recent years, that of market impact in the options market. Our analysis is based on a proprietary database of metaorders-large orders that are split into smaller pieces before being sent to the market on one of the main Asian markets. In line with our previous work on the equity market [Said et al., 2018], we propose an algorithmic approach to identify metaorders, based on some implied volatility parameters, the at the money forward volatility and at the money forward skew. In both cases, we obtain results similar to the now well understood equity market: Square-root law, Fair Pricing Condition and Market Impact Dynamics.

Model-Based Regulation and Firms' Access to Finance
Tuuli, Saara
This paper investigates the impact of the model-based approach to bank capital regulation (i.e. the Internal Ratings Based Approach; IRBA) on firms' access to finance. A difference-in-differences methodology is used given that the IRBA, introduced as part of Basel II, was adopted by different banks in different times. The results suggest that firms indirectly affected by the new regulation via their main bank adopting the IRBA faced a 6-7 percentage point higher probability of facing a deterioration in their access to finance. When the sample is adjusted for the demand for credit, this estimate increases to 12-13 percentage points. The impact is found to come via increases in the cost of credit and to a smaller extent, reductions in the volume or size of loans. Around three-quarters of the effect is attributed to the sensitivity of the IRBA capital requirements to economic conditions, with adopting banks also found to specialize in low-risk lending.

Monetary Policy Transmission to Mortgages in a Negative Interest Rate Environment
Amzallag, Adrien,Calza, Alessandro,Georgarakos, Dimitris,Sousa, João
Do negative policy rates hinder banks’ transmission of monetary policy? To answer this question, we examine the behaviour of Italian mortgage lenders using a novel loan-level dataset. When policy rates turn negative, banks with higher ratios of retail overnight deposits to total assets charge more on new fixed rate mortgages. This suggests that the funding structure of banks may matter for the transmission of negative policy rates, especially for long-maturity illiquid assets. Nevertheless, the aggregate economic implications for households are small, suggesting that concerns about inefficient monetary policy transmission to households under modestly negative rates are likely overstated.

Monetary Policy, Macroprudential Policy, and Financial Stability
Martinez-Miera, David,Repullo, Rafael
This paper reexamines from a theoretical perspective the role of monetary and macroprudential policies in addressing the build-up of risks in the financial system. We construct a stylized general equilibrium model in which the key friction comes from a moral hazard problem in firms' financing that banks' equity capital serves to ameliorate. Tight monetary policy is introduced by open market sales of government debt, and tight macroprudential policy by an increase in capital requirements. We show that both policies are useful, but macroprudential policy is more effective in terms of financial stability and leads to higher social welfare.

Multiscale Asymptotic Analysis for Portfolio Optimization under Stochastic Environment
Jean-Pierre Fouque,Ruimeng Hu

Empirical studies indicate the presence of multi-scales in the volatility of underlying assets: a fast-scale on the order of days and a slow-scale on the order of months. In our previous works, we have studied the portfolio optimization problem in a Markovian setting under each single scale, the slow one in [Fouque and Hu, SIAM J. Control Optim., 55 (2017), 1990-2023], and the fast one in [Hu, Proceedings of IEEE CDC 2018, accepted]. This paper is dedicated to the analysis when the two scales coexist in a Markovian setting. We study the terminal wealth utility maximization problem when the volatility is driven by both fast- and slow-scale factors. We first propose a zeroth-order strategy, and rigorously establish the first order approximation of the associated problem value. This is done by analyzing the corresponding linear partial differential equation (PDE) via regular and singular perturbation techniques, as in the single-scale cases. Then, we show the asymptotic optimality of our proposed strategy within a specific family of admissible controls. Interestingly, we highlight that a pure PDE approach does not work in the multi-scale case and, instead, we use the so-called epsilon-martingale decomposition. This completes the analysis of portfolio optimization in both fast mean-reverting and slowly-varying Markovian stochastic environments.

Ownership Structure and the Cost of Debt: Evidence from Chinese Corporate Bond Market
Chatterjee, Sris,Gu, Xian,Hasan, Iftekhar,Lu, Haitian
We study how firms’ ownership structure affects the cost of debt using evidence from Chinese corporate bond market. Our result shows state, institutional, and foreign ownership all help to reduce firms’ cost of debt. The effect of state ownership is more pronounced if the issuer is headquartered in stronger marketized provinces, operates in industries less dominant by state asset, and after the Party’s anti-corruption campaign. Institutional ownership matters more in low marketized environment especially for lower quality firms. Our evidence sheds light on the ownership-cost of debt nexus in a political economy where state and private firms face productivity and credit frictions, and how market environment interacts with corporate ownership on the cost of bond.

Repo Rates and the Collateral Spread Puzzle
Nyborg, Kjell G.
Repo rates frequently exceed unsecured rates in practice. As an explanation, this paper derives a constrained-arbitrage relation between the unsecured rate, the repo rate, and the illiquidity adjusted expected rate of return of the underlying collateral. The theory is based on unsecured borrowing constraints in the market for liquidity. Repos and security cash-market trades are alternative means to get liquidity. Collateral spreads (unsecured less repo rate) can turn negative if borrowing constraints tighten, unsecured rates spike down, or from a depressed and illiquid security market. The constrained-arbitrage theory sheds light on the evolution of collateral spreads over time.

Repo Rates and the Collateral Spread: Evidence
Nyborg, Kjell G.,Rösler, Cornelia
The spread between unsecured and repo rates (collateral spread) fluctuates substantially and is negative on a significant portion of days. Recent theoretical work argues that collateral spreads are determined by a constrained-arbitrage relation between the unsecured rate, the repo rates, and the expected rate of return of the underlying security. Negative collateral spreads arise in equilibrium if unsecured markets are sufficiently tight, unsecured rates spike down, or security markets are sufficiently depressed in terms of prices, liquidity, and volatility. The objective of this paper is to examine the determinants of collateral spreads by testing the constrained-arbitrage theory. The findings are supportive.

Risk Management with Tail Conditional Certainty Equivalents
Nicole Bäuerle,Tomer Shushi

Certainty Equivalent is a utility-based measure that performs as a measure in which investors are indifferent between this measure and investment that holds some uncertainty. Therefore, it plays an essential role in utility-based decision making. One of the most extensively used risk measures is the Value at Risk, which is investigated and used by both researchers and practitioners as a powerful tool that measures the risk under some quantile level which allows focusing on the extreme amount of losses. In this paper, we propose a natural generalization of the Certainty Equivalent measure that, similar to the Value at Risk measure, is focusing on the tail distribution of the risk, and thus, focusing on extreme financial and insurance risk events. We then investigate the fundamental properties of the proposed measure and show its unique features and implications in the risk measurement process. Furthermore, we derive formulas for truncated elliptical models of losses and provide formulas for selected members of such models.

Stress Testing Household Debt
Bhutta, Neil,Bricker, Jesse,Dettling, Lisa,Kelliher, Jimmy,Laufer, Steven
We estimate a county-level model of household delinquency and use it to conduct "stress tests" of household debt. Applying house price and unemployment rate shocks from Comprehensive Capital Analysis Review (CCAR) stress tests, we find that forecasted delinquency rates for the recent stock of debt are moderately lower than for the stock of debt before the 2007-09 financial crisis, given the same set of shocks. This decline in expected delinquency rates under stress reflects an improvement in debt-to-income ratios and an increase in the share of debt held by borrowers with relatively high credit scores. Under an alternative scenario where the size of house price shocks depends on housing valuations, we forecast a much lower delinquency rate than occurred during the crisis, reflecting more reasonable housing valuations than pre-crisis. Stress tests using other scenarios for the path of house prices and unemployment also support the conclusion that household debt curren tly poses a lower risk to financial stability than before the financial crisis.

Testing if the market microstructure noise is fully explained by the informational content of some variables from the limit order book
Simon Clinet,Yoann Potiron

In this paper, we build tests for the presence of residual noise in a model where the market microstructure noise is a known parametric function of some variables from the limit order book. The tests compare two distinct quasi-maximum likelihood estimators of volatility, where the related model includes a residual noise in the market microstructure noise or not. The limit theory is investigated in a general nonparametric framework. In the presence of residual noise, we examine the central limit theory of the related quasi-maximum likelihood estimation approach.

The Euro Crisis in the Mirror of the EMS
Corsetti, Giancarlo,Eichengreen, Barry,Hale, Galina,Tallmann, Eric
Why was recovery from the euro area crisis delayed for a decade? The explanation lies in the absence of credible and timely policies to backstop financial intermediaries and sovereign debt markets. In this paper we add light and color to this analysis, contrasting recent experience with the 1992-3 crisis in the European Monetary System, when national central banks and treasuries more successfully provided this backstop. In the more recent episode, the incomplete development of the euro area constrained the ability of the ECB and other European institutions to do likewise.

The Long and Short of it: The Post-Crisis Corporate CDS Market
Boyarchenko, Nina,Costello, Anna M.,Shachar, Or
The 2007-2009 financial crisis highlighted the vulnerability of financial institutions linked by a complex web of credit default swap (CDS) contracts, sparking a wave of regulatory changes to the structure of the market. In this paper, we provide broad evidence on the evolution of the CDS market in the post-crisis period, document the properties of participants' exposures to corporate CDS over time, and study the differential pricing of transactions between different types of counterparties.

The Unintended Impact of Academic Research on Asset Returns: The CAPM Alpha
Horenstein, Alex R.
This paper explores a channel whereby asset-pricing anomalies can appear as investors alter portfolios according to findings in academic research. In particular, I find that assets with low realized CAPM alphas outperform those with high ones, but only after the CAPM’s publication in the 1960s. In a multifactor world the CAPM is misspecified. Then, its widespread application and the multifactor literature that followed generated incentives for fund managers to tilt portfolios systematically away from low CAPM alpha assets, causing such assets to be undervalued. My results also provide an alternative explanation for existing anomalies based on past return patterns.

Uncertainty, Access to Debt, and Firm Precautionary Behavior
Favara, Giovanni,Gao, Janet,Giannetti, Mariassunta
Little is known on whether financial factors influence firms' vulnerability to uncertainty shocks. We show that access to debt markets mitigates the effects of uncertainty on corporate policies. We use the staggered introduction of anti-recharacterization laws in U.S. states-which strengthened creditors' rights to repossess collateral pledged through SPVs-to identify firms' improved access to debt markets. After the passage of the laws, firms that face more uncertainty hoard less cash, and increase leverage and intangible investment. Firms' vulnerability to uncertainty shocks is reduced by the enhanced ability to issue debt through SPVs.

Where Does Human Resources Sit at the Strategy Table?
Hamilton, Courtney,Larcker, David F.,Miles, Stephen,Tayan, Brian
Two decades ago, McKinsey advanced the idea that large U.S. companies are engaged in a “war for talent” and that to remain competitive they need to make a strategic effort to attract, retain, and develop the highest-performing executives. To understand the contribution of the human resources department to company strategy, we surveyed 85 CEOs and chief human resources officers at Fortune 1000 companies. In this Closer Look, we examine what these senior executives say about the contribution of HR to the strategic efforts and financial performance of their companies.We ask:• What role does HR play in the development of corporate strategy?• Does HR have an equal voice or is it junior to other members of the senior management team?• Do boards see HR and human capital as critical to corporate performance?• How do boards ascertain whether management has the right HR strategy?• How adept are companies at using data from HR systems to learn what programs work and why?

Why is the Value Estimated from the Constant Dividend Growth Model not an Equilibrium Value?
Cheng, Joseph,Jiao, Ellen
For dividend discount models, the intrinsic value of stock is estimated by discounting all the future dividends of the stock. In the simplest assumption where growth is constant forever, the Constant Dividend Growth Model formula is expressed as P = D1 / (k-g). The premise is that the firm will pay future dividend that will grow at a constant rate.In this paper, we show that the price generated by this traditional formula is not stable if ROE is not equal to k. In the long run where capital can be varied, the company’s ROE should be equal to k. Otherwise, firms will have the incentive to boost share value by increasing or reducing capital accordingly. The long run equilibrium state is attained when the return on equity is equal to the required return (k = ROE). In such case, the constant dividend growth model can be simplified to: V = EPS1 / k. Only in the condition where k = ROE would the price yielded by the traditional dividend growth model is stable. Interestingly, the derived valuation formula for the long run equilibrium condition is based on only EPS and required return, which means that the model can also be applied to firms which pay no dividend.

the Anatomy of the Euro Area Interest Rate Swap Market
Dalla Fontana, Silvia,Holz auf der Heide, Marco,Pelizzon, Loriana,Scheicher, Martin
Using a novel regulatory dataset of fully identified derivatives transactions, this paper provides the first comprehensive analysis of the structure of the euro area interest rate swap (IRS) market after the start of the mandatory clearing obligation. Our dataset contains 1.7 million bilateral IRS transactions of banks and non-banks. Our key results are as follows: 1) The euro area IRS market is highly standardised and concentrated around the group of the G16 Dealers but also around a significant group of core “intermediaries”(and major CCPs). 2) Banks are active in all segments of the IRS euro market, whereas non-banks are often specialised. 3) When using relative net exposures as a proxy for the “flow of risk”in the IRS market, we find that risk absorption takes place in the core as well as the periphery of the network. 4) Among the Basel III capital and liquidity ratios, the leverage ratio plays a key role in determining a bank’s IRS trading activity. 5) Also, after mandatory central clearing, there is still a large dispersion in IRS transaction prices, which is partly determined by bank characteristics, such as the leverage ratio.