IDEAS home Printed from https://ideas.repec.org/p/hal/journl/hal-03579309.html
   My bibliography  Save this paper

CoMargin

Author

Listed:
  • Jorge Cruz Lopez
  • Jeffrey Harris
  • Christophe Hurlin

    (LEO - Laboratoire d'Économie d'Orleans [UMR7322] - UO - Université d'Orléans - UT - Université de Tours - CNRS - Centre National de la Recherche Scientifique)

  • Christophe Pérignon

Abstract

We present CoMargin, a new methodology to estimate collateral requirements in derivatives central counterparties (CCPs). CoMargin depends on both the tail risk of a given market participant and its interdependence with other participants. Our approach internalizes trading externalities and enhances the stability of CCPs, thus reducing systemic risk concerns. We assess our methodology using proprietary data from the Canadian Derivatives Clearing Corporation that include daily observations of the actual trading positions of all of its members from 2003 to 2011. We show that CoMargin outperforms existing margining systems by stabilizing the probability and minimizing the shortfall of simultaneous margin-exceeding losses.

Suggested Citation

  • Jorge Cruz Lopez & Jeffrey Harris & Christophe Hurlin & Christophe Pérignon, 2017. "CoMargin," Post-Print hal-03579309, HAL.
    • Handle: RePEc:hal:journl:hal-03579309
    DOI: 10.1017/S0022109017000709
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Other versions of this item:

    • Jorge A. Cruz Lopez & Jeffrey H. Harris & Christophe Hurlin & Christophe Pérignon, 2015. "CoMargin," Working Papers halshs-00979440, HAL.

    References listed on IDEAS

    as
    1. repec:oup:rfinst:v:25:y::i:12:p:3711-3751 is not listed on IDEAS
    2. Jeremy Berkowitz & James O'Brien, 2002. "How Accurate Are Value‐at‐Risk Models at Commercial Banks?," Journal of Finance, American Finance Association, vol. 57(3), pages 1093-1111, June.
    3. Robert A. Jones & Christophe Pérignon, 2013. "Derivatives Clearing, Default Risk, and Insurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 80(2), pages 373-400, June.
    4. Billio, Monica & Getmansky, Mila & Lo, Andrew W. & Pelizzon, Loriana, 2012. "Econometric measures of connectedness and systemic risk in the finance and insurance sectors," Journal of Financial Economics, Elsevier, vol. 104(3), pages 535-559.
    5. Barry Arnold & Robert Beaver & Richard Groeneveld & William Meeker, 1993. "The nontruncated marginal of a truncated bivariate normal distribution," Psychometrika, Springer;The Psychometric Society, vol. 58(3), pages 471-488, September.
    6. Bernanke, Ben S, 1990. "Clearing and Settlement during the Crash," The Review of Financial Studies, Society for Financial Studies, vol. 3(1), pages 133-151.
    7. Christophe Hurlin & Christophe Pérignon, 2012. "Margin Backtesting," Working Papers halshs-00746274, HAL.
    8. Kee-Hong Bae & G. Andrew Karolyi & René M. Stulz, 2003. "A New Approach to Measuring Financial Contagion," The Review of Financial Studies, Society for Financial Studies, vol. 16(3), pages 717-763, July.
    9. Jeremy Berkowitz & Peter Christoffersen & Denis Pelletier, 2011. "Evaluating Value-at-Risk Models with Desk-Level Data," Management Science, INFORMS, vol. 57(12), pages 2213-2227, December.
    10. Duffie, Darrell & Li, Ada & Lubke, Theo, 2010. "Policy Perspectives on OTC Derivatives Market Infrastructure," Research Papers 2046, Stanford University, Graduate School of Business.
    11. Bruno Biais & Florian Heider & Marie Hoerova, 2012. "Clearing, Counterparty Risk, and Aggregate Risk," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 60(2), pages 193-222, July.
    12. Koeppl, Thorsten & Monnet, Cyril & Temzelides, Ted, 2012. "Optimal clearing arrangements for financial trades," Journal of Financial Economics, Elsevier, vol. 103(1), pages 189-203.
    13. Francis A. Longstaff, 2004. "The Flight-to-Liquidity Premium in U.S. Treasury Bond Prices," The Journal of Business, University of Chicago Press, vol. 77(3), pages 511-526, July.
    14. Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 339-350, July.
    15. Horrace, William C., 2005. "Some results on the multivariate truncated normal distribution," Journal of Multivariate Analysis, Elsevier, vol. 94(1), pages 209-221, May.
    16. Darrell Duffie, 2013. "Replumbing Our Financial System: Uneven Progress," International Journal of Central Banking, International Journal of Central Banking, vol. 9(1), pages 251-280, January.
    17. Nicole M. Boyson & Christof W. Stahel & René M. Stulz, 2010. "Hedge Fund Contagion and Liquidity Shocks," Journal of Finance, American Finance Association, vol. 65(5), pages 1789-1816, October.
    18. Peter Christoffersen & Vihang Errunza & Kris Jacobs & Hugues Langlois, 2012. "Is the Potential for International Diversification Disappearing? A Dynamic Copula Approach," The Review of Financial Studies, Society for Financial Studies, vol. 25(12), pages 3711-3751.
    19. Theo Lubke & Ada Li & Darrell Duffie, 2010. "Policy perspectives on OTC derivatives market infrastructure," Staff Reports 424, Federal Reserve Bank of New York.
    20. François Longin & Bruno Solnik, 2001. "Extreme Correlation of International Equity Markets," Journal of Finance, American Finance Association, vol. 56(2), pages 649-676, April.
    21. G. Geoffrey Booth & John Paul Broussard & Teppo Martikainen & Vesa Puttonen, 1997. "Prudent Margin Levels in the Finnish Stock Index Futures Market," Management Science, INFORMS, vol. 43(8), pages 1177-1188, August.
    22. Jordan, James V & Morgan, George Emir, 1990. "Default Risk in Futures Markets: The Customer-Broker Relationship," Journal of Finance, American Finance Association, vol. 45(3), pages 909-933, July.
    23. Theodore E. Day, 2004. "Margin Adequacy and Standards: An Analysis of the Crude Oil Futures Market," The Journal of Business, University of Chicago Press, vol. 77(1), pages 101-136, January.
    24. Hirshleifer, David & Subrahmanyam, Avanidhar & Titman, Sheridan, 1994. "Security Analysis and Trading Patterns When Some Investors Receive Information before Others," Journal of Finance, American Finance Association, vol. 49(5), pages 1665-1698, December.
    25. Jean-Sébastien Fontaine & Héctor Pérez Saiz & Joshua Slive, 2012. "When Lower Risk Increases Profit: Competition and Control of a Central Counterparty," Staff Working Papers 12-35, Bank of Canada.
    26. Robert R. Bliss & Robert Steigerwald, 2006. "Derivatives clearing and settlement: a comparison of central counterparties and alternative structures," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 30(Q IV), pages 22-29.
    27. Ser-Huang Poon, 2004. "Extreme Value Dependence in Financial Markets: Diagnostics, Models, and Financial Implications," The Review of Financial Studies, Society for Financial Studies, vol. 17(2), pages 581-610.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Selma Chaker & Nour Meddahi, 2013. "CoMargin," Staff Working Papers 13-47, Bank of Canada.
    2. Robert A. Jones & Christophe Pérignon, 2013. "Derivatives Clearing, Default Risk, and Insurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 80(2), pages 373-400, June.
    3. Andersen, Torben G. & Bollerslev, Tim & Christoffersen, Peter F. & Diebold, Francis X., 2013. "Financial Risk Measurement for Financial Risk Management," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1127-1220, Elsevier.
    4. Albert J. Menkveld & Emiliano Pagnotta & Marius A. Zoican, 2013. "Central Clearing and Asset Prices," Tinbergen Institute Discussion Papers 13-181/IV/DSF67, Tinbergen Institute.
    5. Massimiliano Affinito & Matteo Piazza, 2021. "Always Look on the Bright Side? Central Counterparties and Interbank Markets during the Financial Crisis," International Journal of Central Banking, International Journal of Central Banking, vol. 17(1), pages 231-283, March.
    6. Arnold, M., 2017. "The impact of central clearing on banks’ lending discipline," Journal of Financial Markets, Elsevier, vol. 36(C), pages 91-114.
    7. Torben G. Andersen & Tim Bollerslev & Peter Christoffersen & Francis X. Diebold, 2007. "Practical Volatility and Correlation Modeling for Financial Market Risk Management," NBER Chapters, in: The Risks of Financial Institutions, pages 513-544, National Bureau of Economic Research, Inc.
    8. Denisa Banulescu-Radu & Christophe Hurlin & Jérémy Leymarie & Olivier Scaillet, 2021. "Backtesting Marginal Expected Shortfall and Related Systemic Risk Measures," Management Science, INFORMS, vol. 67(9), pages 5730-5754, September.
    9. Shan, Chenyu & Tang, Dragon Yongjun & Wang, Sarah Qian & Zhang, Chang, 2022. "The diversification benefits and policy risks of accessing China’s stock market," Journal of Empirical Finance, Elsevier, vol. 66(C), pages 155-175.
    10. Antinolfi, Gaetano & Carapella, Francesca & Carli, Francesco, 2022. "Transparency and collateral: central versus bilateral clearing," Theoretical Economics, Econometric Society, vol. 17(1), January.
    11. Billio, M. & Donadelli, M. & Paradiso, A. & Riedel, M., 2017. "Which market integration measure?," Journal of Banking & Finance, Elsevier, vol. 76(C), pages 150-174.
    12. Shegorika Rajwani & Dilip Kumar, 2016. "Asymmetric Dynamic Conditional Correlation Approach to Financial Contagion: A Study of Asian Markets," Global Business Review, International Management Institute, vol. 17(6), pages 1339-1356, December.
    13. Cerrato, Mario & Crosby, John & Kim, Minjoo & Zhao, Yang, 2015. "US Monetary and Fiscal Policies - Conflict or Cooperation?," SIRE Discussion Papers 2015-78, Scottish Institute for Research in Economics (SIRE).
    14. Francine Gresnigt & Erik Kole & Philip Hans Franses, 2017. "Exploiting Spillovers to Forecast Crashes," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 36(8), pages 936-955, December.
    15. Mensi, Walid & Rehman, Mobeen Ur & Vo, Xuan Vinh, 2021. "Risk spillovers and diversification between oil and non-ferrous metals during bear and bull market states," Resources Policy, Elsevier, vol. 72(C).
    16. Martin Hoesli & Kustrim Reka, 2013. "Volatility Spillovers, Comovements and Contagion in Securitized Real Estate Markets," The Journal of Real Estate Finance and Economics, Springer, vol. 47(1), pages 1-35, July.
    17. Colletaz, Gilbert & Hurlin, Christophe & Pérignon, Christophe, 2013. "The Risk Map: A new tool for validating risk models," Journal of Banking & Finance, Elsevier, vol. 37(10), pages 3843-3854.
    18. Duffie, Darrell & Scheicher, Martin & Vuillemey, Guillaume, 2015. "Central clearing and collateral demand," Journal of Financial Economics, Elsevier, vol. 116(2), pages 237-256.
    19. Injun Hwang & Baeho Kim, 2020. "Heterogeneity and netting efficiency under central clearing: A stochastic network analysis," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(2), pages 192-208, February.
    20. Cerrato, Mario & Crosby, John & Kim, Minjoo & Zhao, Yang, 2014. "Modeling Dependence Structure and Forecasting Portfolio Value-at-Risk with Dynamic Copulas," SIRE Discussion Papers 2015-25, Scottish Institute for Research in Economics (SIRE).

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hal:journl:hal-03579309. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: CCSD (email available below). General contact details of provider: https://hal.archives-ouvertes.fr/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.