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Margin Setting in Credit Derivatives Clearing Houses

Byström, Hans LU (2010) In Journal of Fixed Income 19(4). p.37-43
Abstract
The possible benefits of introducing central counterparties, or clearing houses, in the credit derivatives market is currently intensively debated among bankers and policymakers. The exact outcome of this discussion is not yet clear but regardless of how any eventual clearing is organized the actual clearing house needs to be properly capitalized and needs to maintain accurate margin (collateral) levels. In this article we therefore discuss how extreme value theory can be used to compute margin levels for such a clearing house. We present some evidence of credit derivatives price change distributions being significantly non-normal, and margins based on extreme value theory are found to be more accurate than those based on normal or... (More)
The possible benefits of introducing central counterparties, or clearing houses, in the credit derivatives market is currently intensively debated among bankers and policymakers. The exact outcome of this discussion is not yet clear but regardless of how any eventual clearing is organized the actual clearing house needs to be properly capitalized and needs to maintain accurate margin (collateral) levels. In this article we therefore discuss how extreme value theory can be used to compute margin levels for such a clearing house. We present some evidence of credit derivatives price change distributions being significantly non-normal, and margins based on extreme value theory are found to be more accurate than those based on normal or historical distributions, particularly at more conservative margin levels. (Less)
Please use this url to cite or link to this publication:
author
organization
publishing date
type
Contribution to journal
publication status
published
subject
keywords
extreme value theory, clearing house, central counterparty, margin, credit derivative, OTC, iTraxx
in
Journal of Fixed Income
volume
19
issue
4
pages
37 - 43
publisher
institutional investor journal
external identifiers
  • scopus:77956322865
ISSN
1059-8596
DOI
10.3905/JFI.2010.19.4.037
language
English
LU publication?
yes
id
5a5afc84-fdbf-4ccd-938c-a33c7708ecf6 (old id 1758787)
date added to LUP
2011-01-10 12:20:36
date last changed
2017-01-01 07:44:03
@article{5a5afc84-fdbf-4ccd-938c-a33c7708ecf6,
  abstract     = {The possible benefits of introducing central counterparties, or clearing houses, in the credit derivatives market is currently intensively debated among bankers and policymakers. The exact outcome of this discussion is not yet clear but regardless of how any eventual clearing is organized the actual clearing house needs to be properly capitalized and needs to maintain accurate margin (collateral) levels. In this article we therefore discuss how extreme value theory can be used to compute margin levels for such a clearing house. We present some evidence of credit derivatives price change distributions being significantly non-normal, and margins based on extreme value theory are found to be more accurate than those based on normal or historical distributions, particularly at more conservative margin levels.},
  author       = {Byström, Hans},
  issn         = {1059-8596},
  keyword      = {extreme value theory,clearing house,central counterparty,margin,credit derivative,OTC,iTraxx},
  language     = {eng},
  number       = {4},
  pages        = {37--43},
  publisher    = {institutional investor journal},
  series       = {Journal of Fixed Income},
  title        = {Margin Setting in Credit Derivatives Clearing Houses},
  url          = {http://dx.doi.org/10.3905/JFI.2010.19.4.037},
  volume       = {19},
  year         = {2010},
}