The collateral rule: Evidence from the credit default swap market

Agostino Capponi, Wan-Schwin Allen Cheng, Stefano Giglio and Richard Haynes

Journal of Monetary Economics, 2022, vol. 126, issue C, 58-86

Abstract: In this paper, we explore a novel dataset of daily credit default swap (CDS) positions cleared by the largest CDS clearinghouse along with posted margins to study how collateral varies with portfolio risks and market conditions. Contrary to many theoretical models, where collateral constraints follow Value-at-Risk rules, we find strong evidence that collateral requirements are set an order of magnitude larger than what Value-at-Risk rules imply. The panel variation in collateralization rates is well captured by measures of extreme tail risks. We develop a model of endogenous collateral, which explains the conservativeness of collateral levels through disagreement about extreme states.

Keywords: Collateral requirements; Value at risk; Endogenous collateral; Clearinghouses; Tail risk measures (search for similar items in EconPapers)
JEL-codes: G20 G24 G28 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304393221001458
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:moneco:v:126:y:2022:i:c:p:58-86

DOI: 10.1016/j.jmoneco.2021.12.003

Access Statistics for this article

Journal of Monetary Economics is currently edited by R. G. King and C. I. Plosser

More articles in Journal of Monetary Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu (repec@elsevier.com).