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Margin requirements based on a stochastic correlation model

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  • Dávid Zoltán Szabó
  • Kata Váradi

Abstract

We demonstrate that margin requirements of central counterparties show a significantly different behavior when calculated with a portfoliowise treatment instead of taking the weighted sum of the margin requirements of the components without accounting for their correlation structures. This is shown via simulating trajectories of a joint stochastic volatility–stochastic correlation model. Results indicate that an unnecessarily large overmargin requirement is set by regulators when the applied risk measure is not calculated via a portfoliowise treatment. Finally, accounting for the correlation structure of the assets during the margining process would not lead to an overly prudent method, nor would it cause greater procyclicality.

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  • Dávid Zoltán Szabó & Kata Váradi, 2022. "Margin requirements based on a stochastic correlation model," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(10), pages 1797-1820, October.
    • Handle: RePEc:wly:jfutmk:v:42:y:2022:i:10:p:1797-1820
    DOI: 10.1002/fut.22360
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