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Systemic Risk and Collateral Adequacy: Evidence from the Futures Market

Published online by Cambridge University Press:  12 April 2021

Radoslav Raykov Open the ORCID record for Radoslav Raykov [Opens in a new window]
Radoslav Raykov*
Affiliation:
Bank of Canada Financial Stability Department
*
[email protected] (corresponding author)
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Abstract

Conventional collateral requirements for derivatives are conservative, but not explicitly designed to buffer systemic risk. I explore collateral adequacy against systemic risk in the Canadian futures market during the 2008 crisis. I find that conventional collateral levels adequately absorb systemic risk, even allowing for an implausibly high level of stress, and that systemic risk spillovers do not exceed the effect of an approximately 1% downward stock price move. I also document that the largest systemic risk contributors are buffered relatively less than the rest, and that there is a large cross-country difference in the behavior of U.S. and Canadian institutions.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 57 , Issue 3 , May 2022 , pp. 1142 - 1173
Copyright
© The Author(s), 2021. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

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Footnotes

The author thanks two anonymous referees, Jennifer Conrad (the editor), Gerardo Ferrara, Rod Garratt, Charlie Kahn, Miguel Molico, Hector Perez-Saiz, and Maarten van Oordt for valuable comments, and CDCC for providing the data. Marion Boddy, Alexander Chaudhry, and Nick Kazaka provided excellent research assistance. All views expressed are those of the author and do not necessarily represent the views of the Bank of Canada.

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