What is a ‘Haircut’
A haircut is the difference between prices at which a market maker can buy and sell a security. The term comes from the fact that market makers can trade at such a thin spread.
Explaining ‘Haircut’
In the financial world, a haircut refers to a negative spread between either the buying and selling prices of a security or the lower-than-market value placed on a security that is being used as collateral. The haircut is expressed as a percentage of the markdown between the two values. When they are used as collateral, securities are generally devalued, since a cushion is required by the lending parties in case the market value falls.
Further Reading
- A structural analysis of credit risk with risky collateral: a methodology for haircut determination – onlinelibrary.wiley.com [PDF]
- The Devil's Haircut: Investor–State Disputes over Debt Restructuring – journals.sagepub.com [PDF]
- Time for a haircut: political regimes and sovereign debt restructurings – www.tandfonline.com [PDF]
- Holding out for a haircut: financial crisis, moral hazard, and interest rate policy – onlinelibrary.wiley.com [PDF]
- Sovereign crises and bank financing: Evidence from the European repo market – ideas.repec.org [PDF]
- How much for a haircut? Illiquidity, secondary markets, and the value of private equity – papers.ssrn.com [PDF]
- Haircut size, haircut type and the probability of serial sovereign debt restructurings – papers.ssrn.com [PDF]
