David Murphy “The Impulsive Approach to Procyclicality” című kutatási szemináriuma
Az előadás alcíme: “Measuring the reactiveness of risk-based initial margin models to changes in market conditions using impulse response functions”.
Title: The Impulsive Approach to Procyclicality – Measuring the reactiveness of risk-based initial margin models to changes in market conditions using impulse response functions
Research Seminar by David Murphy
Date and Time: 30 October, 2023, Monday, 11:40-1:00 (Budapest time)
Venue: Corvinus Building C, Ground Floor, Room C.VII
Language: English
Abstract: In recent years, many derivatives market participants received large margin calls in episodes of market volatility such as the onset of the Covid-19 global pandemic and the illegal Russian invasion of Ukraine. These events sometimes created liquidity stress and, as result, reinvigorated the policy debate about how reactive margin should be to changes in market conditions. This debate has been hampered by the lack of a generally accepted way of measuring the reactiveness of the models used to calculate initial margin. The first contribution of this paper is to provide such a measure. We consider a step function in volatility, and examine the responses of various models to paths of risk factor returns consistent with this impulse, introducing the impulse response function as a convenient means of presenting this reaction.
The results presented demonstrate that a model’s impulse response is a robust and useful measure of its reactiveness. This approach could be used to set quantitative limits on initial margin model reactiveness, or procyclicality as it is often termed. It also provides significant, novel insights into the behaviour of some economically important margin models. In particular, the over-reaction of filtered historical simulation value at risk models to increases in volatility is demonstrated and the reasons for it are explored. The behaviour of two widely-used anti-procyclicality tools, the buffer and the use of a stressed period, are also analysed: the latter is found to be more successful at mitigating procyclicality than the former. The paper concludes with a discussion of the policy implications of the results presented. (Joint work with Pedro Gurrola Perez, WFE).
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