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The Price of Protection: Derivatives, Default Risk, and Margining


  • Rajna GIBSON

    (University of Geneva and Swiss Finance Institute)

  • Carsten MURAWSKI

    (The University of Melbourne)


By attaching collateral to a derivatives contract, margining supposedly reduces default risk. In this paper, we rst develop a set of testable hypotheses about the e ects of margining on banks' welfare, trading volume, and default risk in the context of a stylized banking sector equilibrium model. Subsequently, we test these hypotheses with a market simulation model. Capturing some of the main characteristics of derivatives markets, we identify stress situations in which margining has an ambiguous impact on banks' welfare, increases banks' default risk while reducing their aggregate trading volume. This is the case, in particular, when margin rates are high and collateral is scarce.

Suggested Citation

  • Rajna GIBSON & Carsten MURAWSKI, "undated". "The Price of Protection: Derivatives, Default Risk, and Margining," Swiss Finance Institute Research Paper Series 08-43, Swiss Finance Institute.
  • Handle: RePEc:chf:rpseri:rp0843

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    Cited by:

    1. 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.

    More about this item


    Derivative Securities; Default Risk; Collateral; Margining; Systemic Risk.;

    JEL classification:

    • G19 - Financial Economics - - General Financial Markets - - - Other
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages


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