Procyclical variation margins in central clearing

YangKyu Jin and Sangwon Suh

The North American Journal of Economics and Finance, 2024, vol. 70, issue C

Abstract: This study analyzes the effect of asset prices on the daily exchange of profit and loss from derivatives contracts in central clearing, called variation margin (VM). It provides empirical evidence that the VM exhibits a high volatility and a significant relation to changes in market prices. The magnitude of VM procyclicality has significant implications for systemic risk. This study analytically shows that an internal loan facility can reduce liquidity hoarding and external funding during stress periods and thus contribute to contain systemic risk. In addition, this study proposes a new scheme called the posting of variation margin in securities (PVMS) clause as an example of internal loan facility between the contract counterparties. The PVMS can replace cash VM payments with collateral posting in times of market stress.

Keywords: CCP; Variation margin; Initial margin; Procyclicality; Systemic risk (search for similar items in EconPapers)
JEL-codes: G18 G23 G28 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1062940823001626
Full text for ScienceDirect subscribers only

Related works:
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:ecofin:v:70:y:2024:i:c:s1062940823001626

DOI: 10.1016/j.najef.2023.102039

Access Statistics for this article

The North American Journal of Economics and Finance is currently edited by Hamid Beladi

More articles in The North American Journal of Economics and Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().