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Crowded Trades: An Overlooked Systemic Risk for Central Clearing Counterparties

Author

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  • Albert J. Menkveld

    (VU University Amsterdam, the Netherlands)

Abstract

Counterparty default risk might hamper trade and trigger a financial crisis. The introduction of a central clearing counterparty (CCP) benefits trading but pushes systemic risk into CCP default. Standard risk management strategies at CCPs currently overlook a risk associated with crowded trades. This paper identifies it, measures it, and proposes a margin methodology that accounts for it. The application to actual CCP data illustrates that this hidden risk can become large, in particular at times of high CCP risk.

Suggested Citation

  • Albert J. Menkveld, 2014. "Crowded Trades: An Overlooked Systemic Risk for Central Clearing Counterparties," Tinbergen Institute Discussion Papers 14-065/IV/DSF75, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20140065
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    File URL: https://papers.tinbergen.nl/14065.pdf
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    References listed on IDEAS

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    1. G.M. Constantinides & M. Harris & R. M. Stulz (ed.), 2013. "Handbook of the Economics of Finance," Handbook of the Economics of Finance, Elsevier, volume 2, number 2-b.
    2. G.M. Constantinides & M. Harris & R. M. Stulz (ed.), 2013. "Handbook of the Economics of Finance," Handbook of the Economics of Finance, Elsevier, volume 2, number 2-a.
    3. Dimitrios Bisias & Mark Flood & Andrew W. Lo & Stavros Valavanis, 2012. "A Survey of Systemic Risk Analytics," Annual Review of Financial Economics, Annual Reviews, vol. 4(1), pages 255-296, October.
    4. Tsanakas, Andreas, 2009. "To split or not to split: Capital allocation with convex risk measures," Insurance: Mathematics and Economics, Elsevier, vol. 44(2), pages 268-277, April.
    5. Darrell Duffie & Haoxiang Zhu, 2011. "Does a Central Clearing Counterparty Reduce Counterparty Risk?," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 1(1), pages 74-95.
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    Cited by:

    1. Yannick Armenti & Stéphane Crépey, 2017. "Central Clearing Valuation Adjustment," Working Papers hal-01169169, HAL.
    2. Bruno, Salvatore & Chincarini, Ludwig B. & Ohara, Frank, 2018. "Portfolio construction and crowding," Journal of Empirical Finance, Elsevier, vol. 47(C), pages 190-206.
    3. Yang, Chunpeng & Zhou, Liyun, 2016. "Individual stock crowded trades, individual stock investor sentiment and excess returns," The North American Journal of Economics and Finance, Elsevier, vol. 38(C), pages 39-53.
    4. Liyun Zhou & Chunpeng Yang, 2019. "Differences in the effects of seller-initiated versus buyer-initiated crowded trades in stock markets," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 14(4), pages 859-890, December.
    5. Chincarini, Ludwig B. & Moneta, Fabio, 2021. "The challenges of oil investing: Contango and the financialization of commodities," Energy Economics, Elsevier, vol. 102(C).
    6. Paul Glasserman & Ciamac C. Moallemi & Kai Yuan, 2016. "Hidden Illiquidity with Multiple Central Counterparties," Operations Research, INFORMS, vol. 64(5), pages 1143-1158, October.
    7. Yannick Armenti & St'ephane Cr'epey, 2015. "Central Clearing Valuation Adjustment," Papers 1506.08595, arXiv.org, revised Feb 2017.

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    Keywords

    Financial economics;

    JEL classification:

    • G00 - Financial Economics - - General - - - General

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