Dynamic margin optimization

Edina Berlinger, Zsolt Bihary and Barbara Dömötör ()

Finance Research Letters, 2024, vol. 68, issue C

Abstract: In response to the Global Financial Crisis of 2007–2009, by now, most of the financial transactions must be cleared through central counterparties operating a dynamic margin setting mechanism. High margin calls can reduce counterparty risk in a turbulent market, but at the same time, increase liquidity risk and escalate systemic risk. In this paper, we construct a theoretical model to address this challenge, deriving an optimal margin setting policy framed as a stochastic control problem. Our analysis reveals that an adaptive, countercyclical approach is superior to a purely risk-sensitive strategy, primarily by minimizing the expected loss for the clearing institution.

Keywords: Central counterparty; Clearing; Countercyclical margin; Dynamic modelling; Stochastic control (search for similar items in EconPapers)
JEL-codes: G21 G32 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:68:y:2024:i:c:s1544612324010298

DOI: 10.1016/j.frl.2024.105999

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