Counterparty risk denotes the risk that a party defaults in a bilateralcontract. This risk not only depends on the two parties involved, but also onthe risk from various other contracts each of these parties holds. In ratherinformal markets, such as the OTC (over-the-counter) derivative market,institutions only report their aggregated quarterly risk exposure, but nodetails about their counterparties. Hence, little is known about thediversification of counterparty risk. In this paper, we reconstruct theweighted and time-dependent network of counterparty risk in the OTC derivativesmarket of the United States between 1998 and 2012. To proxy unknown bilateralexposures, we first study the co-occurrence patterns of institutions based ontheir quarterly activity and ranking in the official report. The networkobtained this way is further analysed by a weighted k-core decomposition, toreveal a core-periphery structure. This allows us to compare the activity-basedranking with a topology-based ranking, to identify the most importantinstitutions and their mutual dependencies. We also analyse correlations inthese activities, to show strong similarities in the behavior of the coreinstitutions. Our analysis clearly demonstrates the clustering of counterpartyrisk in a small set of about a dozen US banks. This not only increases thedefault risk of the central institutions, but also the default risk ofperipheral institutions which have contracts with the central ones. Hence, allinstitutions indirectly have to bear (part of) the counterparty risk of allothers, which needs to be better reflected in the price of OTC derivatives.
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