Journal of Financial Market Infrastructures
ISSN:
2049-5404 (print)
2049-5412 (online)
Editor-in-chief: Manmohan Singh
Need to know
- It is argued that simulation techniques for computing Initial Margin (IM) requirements at Central Counterparties are appropriate and needed.
- Robust and capital efficient IM approach for portfolios of Credit Default Swap instruments is presented.
- The approach features heavy-tailed asymmetric univariate distributions combined in a multivariate distribution via copula techniques.
Abstract
In this paper, a clearinghouse framework to establish initial margin requirements for portfolios of credit default swap instruments is presented. The estimation of portfolio risk, attributed to credit spread dynamics, features large-scale Monte Carlo simulations. It is argued that copula-based Monte Carlo implementations possess certain advantages over alternative techniques. Copula-based Monte Carlo simulations are suitable for risk management applications at clearinghouses and provide a robust, capital-efficient and flexible modeling approach to assess the risk of complex portfolios.
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