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Valuing the Futures Market Clearinghouse's Default Exposure during the 1987 Crash

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  • Bates, David
  • Craine, Roger

Abstract

Futures market clearinghouses are intermediaries that make large volume trading between anonymous parties feasible. During the market crash in October 1987, rumors spread that a clearinghouse might fail. This paper presents estimates of three measures of the default exposure. The authors estimate the traditional summary statistic for risk exposure: the tail probabilities. They also estimate two economic measures: the expected value of the payoffs in the tails and expected value of the payoffs in the tails conditional on landing in the tail. The authors' estimates indicate the market thought another crash was unlikely but that if one occurred it would be large.

Suggested Citation

  • Bates, David & Craine, Roger, 1999. "Valuing the Futures Market Clearinghouse's Default Exposure during the 1987 Crash," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(2), pages 248-272, May.
  • Handle: RePEc:mcb:jmoncb:v:31:y:1999:i:2:p:248-72
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    Citations

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    Cited by:

    1. Cotter, John & Dowd, Kevin, 2006. "Spectral Risk Measures with an Application to Futures Clearinghouse Variation Margin Requirements," MPRA Paper 3495, University Library of Munich, Germany.
    2. Berndsen, Ron, 2020. "Five Fundamental Questions on Central Counterparties," Other publications TiSEM 1f3bd844-92ab-4104-8f57-9, Tilburg University, School of Economics and Management.
    3. Olga Lewandowska, 2015. "OTC Clearing Arrangements for Bank Systemic Risk Regulation: A Simulation Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(6), pages 1177-1203, September.
    4. Shi, Wei & Irwin, Scott H., 2006. "What Happens when Peter can't Pay Paul: Risk Management at Futures Exchange Clearinghouses," 2006 Annual meeting, July 23-26, Long Beach, CA 21087, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    5. Robert A. Jones & Christophe Pérignon, 2013. "Derivatives Clearing, Default Risk, and Insurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 80(2), pages 373-400, June.
    6. Fang, Yan & Ielpo, Florian & Sévi, Benoît, 2012. "Empirical bias in intraday volatility measures," Finance Research Letters, Elsevier, vol. 9(4), pages 231-237.
    7. Ravi Bansal & Ivan Shaliastovich, 2009. "Learning and Asset-Price Jumps," NBER Working Papers 14814, National Bureau of Economic Research, Inc.
    8. Shanker, Latha & Balakrishnan, Narayanaswamy, 2006. "Price limits and capital requirements of futures clearinghouses," European Journal of Operational Research, Elsevier, vol. 168(2), pages 281-290, January.

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