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American Economic Review: Vol. 102 No. 3 (May 2012)
AER Volume. 102, Issue 3 | 
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Privacy-Preserving Methods for Sharing Financial Risk Exposures
Article Citation
Abbe, Emmanuel A.,
Amir E. Khandani, and
Andrew W. Lo. 2012. "Privacy-Preserving Methods for Sharing Financial Risk Exposures."
American Economic Review,
102(3): 65-70.
DOI: 10.1257/aer.102.3.65
DOI: 10.1257/aer.102.3.65
Abstract
The financial industry relies on trade secrecy to protect its business processes and methods, which can obscure critical financial risk exposures from regulators and the public. Using results from cryptography, we develop computationally tractable protocols for sharing and aggregating such risk exposures that protect the privacy of all parties involved, without the need for trusted third parties. Financial institutions can share aggregate statistics such as Herfindahl indexes, variances, and correlations without revealing proprietary data. Potential applications include: privacy-preserving real-time indexes of bank capital and leverage ratios; monitoring delegated portfolio investments; financial audits; and public indexes of proprietary trading strategies.
Article Full-Text Access
Full-text Article
Authors
Abbe, Emmanuel A. (Ecole Polytechnique Federale de Lausanne)
Khandani, Amir E. (MIT)
Lo, Andrew W. (MIT and AlphaSimplex Group, Cambridge, MA)
Khandani, Amir E. (MIT)
Lo, Andrew W. (MIT and AlphaSimplex Group, Cambridge, MA)
JEL Classifications
G21: Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
D81: Criteria for Decision-Making under Risk and Uncertainty
G01: Financial Crises
G28: Financial Institutions and Services: Government Policy and Regulation
D81: Criteria for Decision-Making under Risk and Uncertainty
G01: Financial Crises
G28: Financial Institutions and Services: Government Policy and Regulation
