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Crowded Positions: An Overlooked Systemic Risk for Central Clearing Parties*

Crowded Positions: An Overlooked Systemic Risk for Central Clearing Parties* Counterparty risk could hamper trade and worsen a financial crisis. A central clearing party (CCP) insures traders against counterparty default and thus benefits trade. Default of the CCP however becomes a new systemic risk. CCP risk management does not account for risks associated with crowded positions. This paper proposes a CCP exposure measure based on tail risk in trader portfolios. It identifies and measures crowded risk and assigns it to traders according to the polluter pays principle. CCP data show that crowded positions increase CCP exposure most (about one-third) on turbulent days, when exposure is high already.Received October 08, 2016; editorial decision March 13, 2017 by Editor Wayne Ferson http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Review of Asset Pricing Studies Oxford University Press

Crowded Positions: An Overlooked Systemic Risk for Central Clearing Parties*

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References (2)

Publisher
Oxford University Press
Copyright
© The Author 2017. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oup.com
ISSN
2045-9920
eISSN
2045-9939
DOI
10.1093/rapstu/rax016
Publisher site
See Article on Publisher Site

Abstract

Counterparty risk could hamper trade and worsen a financial crisis. A central clearing party (CCP) insures traders against counterparty default and thus benefits trade. Default of the CCP however becomes a new systemic risk. CCP risk management does not account for risks associated with crowded positions. This paper proposes a CCP exposure measure based on tail risk in trader portfolios. It identifies and measures crowded risk and assigns it to traders according to the polluter pays principle. CCP data show that crowded positions increase CCP exposure most (about one-third) on turbulent days, when exposure is high already.Received October 08, 2016; editorial decision March 13, 2017 by Editor Wayne Ferson

Journal

The Review of Asset Pricing Studies – Oxford University Press

Published: Dec 1, 2017

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