Simulating liquidity stress in the derivatives market

Marco Bardoscia, Gerardo Ferrara, Nicholas Vause and Michael Yoganayagam

Journal of Economic Dynamics and Control, 2021, vol. 133, issue C

Abstract: We investigate whether margin calls on derivative counterparties could exceed their available liquid assets and, by preventing immediate payment of those calls, spread such liquidity shortfalls through the market. Using trade repository data on derivative portfolios, we simulate variation margin calls in a stress scenario and compare them with the cash buffers of the institutions facing the calls. Where buffers are insufficient we assume institutions take remedial action such as borrowing to cover the shortfalls, but only after waiting as long as possible to receive payments before making their own. Such delays can force recipients into more extensive remedial action than otherwise. Hence, liquidity shortfalls can grow in aggregate as they spread through the network. However, we find an aggregate liquidity shortfall equivalent to only a modest fraction of average daily cash borrowing in international repo markets. Moreover, we find that only a small part of this aggregate shortfall could be avoided if payments within the counterparty network were coordinated by an external authority.

Keywords: Financial networks; Systemic risk; Derivatives; Central counterparties (search for similar items in EconPapers)
JEL-codes: C63 G20 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0165188921001500
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Simulating liquidity stress in the derivatives market (2019)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:133:y:2021:i:c:s0165188921001500

DOI: 10.1016/j.jedc.2021.104215

Access Statistics for this article

Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

More articles in Journal of Economic Dynamics and Control from Elsevier
Bibliographic data for series maintained by Catherine Liu ().