Margin-setting by Central Counterparties of over-the-counter derivatives

Regulation of the over-the-counter (OTC) derivatives market since the financial crisis of 2008 has had the objective of reducing risks within this marketplace. OTC derivatives are now cleared through central clearing counterparties (CCPs), and one tool of the CCPs is to set adequate margin requirements for their clearing members. In this thesis, I address the obligations of CCPs and the effect of risk management using margin requirements. I develop the methodology of margin setting using a historical simulation and evaluate the resulting risk-based margin requirements for interest rate swaps. I also address an important aspect of margin-setting which is margin procyclicality, under which margin requirements are increased in stressed markets resulting in an increased risk of default on margin calls as well as feedback effects on the underlying assets of clearing members

Crowded trades, market clustering, and price instability

Crowded trades by similarly trading peers influence the dynamics of asset prices, possibly creating systemic risk. We propose a market clustering measure using granular trading data. For each stock the clustering measure captures the degree of trading overlap among any two investors in that stock. We investigate the effect of crowded trades on stock price stability and show that market clustering has a causal effect on the properties of the tails of the stock return distribution, particularly the positive tail, even after controlling for commonly considered risk drivers. Reduced investor pool diversity could thus negatively affect stock price stability

Selected chapters of corporate finance and risk management

This book was prepared for the Finance Master program of the Corvinus University of Budapest started in the academic year 2019/2020. The book consists of two main parts, the first part deals with corporate finance and financing issues, while the second part covers risk management and liquidity management in financial markets. The cases in this book highly build on the knowledge base of the master’s program curriculum, therefore, it is imperative for students to familiarize themselves with the basic notions first, before starting to solve the exercises. If you experience any knowledge gaps, then refer to the regular textbooks before solving the cases. In several cases, the related regulations should also be read in conjunction with the case in order to be able to understand and solve the exercises. This highlights the ever increasing relevance of regulation in the finance industry. Apart from the knowledge of the financial notions, and related regulations, students should also be skilled in using spreadsheets, since several cases cannot be solved without it. We recommend the book both to master’s students in Finance and to practitioners as well