There is currently a lot of discussion about whether OTC derivatives should be traded through clearing houses or not. Among the various OTC derivatives markets that are discussed, the credit default swap market takes center stage. This is a fairly young market, it has figured extensively in the media due to the crisis and it is not as massively huge as for instance the interest rate swap market. This makes this market an interesting test case. I have written frequently about this development here in this blog (see for instance Is the current turmoil a boon for exchange traded credit derivatives? from back in 2007).
In this context I would like to highlight my article that was recently published in The Journal of Fixed Income: Byström, H., (2010), Margin Setting in Credit Derivatives Clearing Houses, The Journal of Fixed Income 19 (4) Spring 2010, pp. 37-43.
In this article I try to stress how extreme the movements in the credit derivatives market have become and how multi-sigma credit spread changes have become the name of the day. This renders traditional methods of calculating margin requirements in clearing houses inadequate and as an alternative I suggest extreme value theory.
Now, it just remains to be seen whether my suggestions will be acknowledged or not!
