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American Economic Review: Vol. 102 No. 3 (May 2012)

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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

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.

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Authors

Abbe, Emmanuel A. (Ecole Polytechnique Federale de Lausanne)
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


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