Dynamic margin optimization

BERLINGER, Edina; Bihary, Zsolt; Dömötör, Barbara

doi:10.1016/j.frl.2024.105999

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Article (Scientific journals)

Dynamic margin optimization

BERLINGER, Edina; Bihary, Zsolt; Dömötör, Barbara

2024 • In Finance Research Letters, 68, p. 105999

Editorial reviewed

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https://hdl.handle.net/10993/63371

DOI
10.1016/j.frl.2024.105999

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Keywords :

Central counterparty; Clearing; Countercyclical margin; Dynamic modelling; Stochastic control; Finance

Abstract :

[en] 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.

Disciplines :

Finance

Author, co-author :

BERLINGER, Edina ; University of Luxembourg > Faculty of Law, Economics and Finance (FDEF) > Department of Finance (DF) ; Corvinus University of Budapest, Institute of Finance, Hungary

Bihary, Zsolt; Corvinus University of Budapest, Institute of Finance, Hungary

Dömötör, Barbara ; Corvinus University of Budapest, Institute of Finance, Hungary

External co-authors :

Language :

English

Title :

Dynamic margin optimization

Publication date :

October 2024

Journal title :

Finance Research Letters

ISSN :

1544-6123

eISSN :

1544-6131

Publisher :

Elsevier Ltd

Volume :

Pages :

105999

Peer reviewed :

Editorial reviewed

Additional URL :

https://api.elsevier.com/content/article/PII:S1544612324010298?httpAccept=text/xml

Funders :

National Research Development and Innovation Office

Funding text :

This research was supported by National Research, Development and Innovation Office - NKFIH, K-138826. Edina Berlinger acknowledge support from the Chair and Research Program in Sustainable Finance at the University of Luxembourg, sponsored by the Ministry of the Environment, Climate and Sustainable Development.

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