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The collateral rule: Evidence from the credit default swap market

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  • Capponi, Agostino
  • Cheng, Wan-Schwin Allen
  • Giglio, Stefano
  • Haynes, Richard

Abstract

In this paper, we explore a novel dataset of daily credit default swap (CDS) positions cleared by the largest CDS clearinghouse along with posted margins to study how collateral varies with portfolio risks and market conditions. Contrary to many theoretical models, where collateral constraints follow Value-at-Risk rules, we find strong evidence that collateral requirements are set an order of magnitude larger than what Value-at-Risk rules imply. The panel variation in collateralization rates is well captured by measures of extreme tail risks. We develop a model of endogenous collateral, which explains the conservativeness of collateral levels through disagreement about extreme states.

Suggested Citation

  • Capponi, Agostino & Cheng, Wan-Schwin Allen & Giglio, Stefano & Haynes, Richard, 2022. "The collateral rule: Evidence from the credit default swap market," Journal of Monetary Economics, Elsevier, vol. 126(C), pages 58-86.
    • Handle: RePEc:eee:moneco:v:126:y:2022:i:c:p:58-86
    DOI: 10.1016/j.jmoneco.2021.12.003
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    Cited by:

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    2. Demange, Gabrielle & Piquard, Thibaut, 2023. "On the choice of central counterparties in the EU," Journal of Financial Markets, Elsevier, vol. 64(C).

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    More about this item

    Keywords

    Collateral requirements; Value at risk; Endogenous collateral; Clearinghouses; Tail risk measures;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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