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Does Central Clearing Affect Price Stability? Evidence from Nordic Equity Markets

44 Pages Posted: 7 Nov 2013 Last revised: 28 Oct 2015

Albert J. Menkveld

VU University Amsterdam; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Emiliano Pagnotta

Imperial College Business School

Marius Zoican

Université Paris Dauphine - PSL Research University

Date Written: October 27, 2015

Abstract

We provide evidence of the effects of introducing a central clearing counterparty (CCP) on price stability by adopting as an experimental construct the 2009 clearing reform in three Nordic equity markets. We find that the daily price volatility of the affected equities experience an economically significant decline of 8.8% relative to pre-reform levels. The decrease in volatility is more pronounced for stocks with a higher margin cost impact, consistent with the predictions of dynamic asset pricing models. We also find that the reform induces a sharp decline of 9.8% in trade volume but no deterioration in market quality as captured by trading costs and information measures. Overall, our results suggest that the adoption of central clearing enhances price stability. Our results also suggest an important coordination role for policy in implementing clearing reforms, since investors failed to voluntarily clear trades in the CCP when given the option.

Keywords: Central clearing, price stability, equity volatility, margin requirement, counterparty risk, liquidity

JEL Classification: G14, G18, G23

Suggested Citation

Menkveld, Albert J. and Pagnotta, Emiliano and Zoican, Marius, Does Central Clearing Affect Price Stability? Evidence from Nordic Equity Markets (October 27, 2015). Available at SSRN: https://ssrn.com/abstract=2350762 or http://dx.doi.org/10.2139/ssrn.2350762

Albert J. Menkveld

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands
+31 20 5986130 (Phone)
+31 20 5986020 (Fax)

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Emiliano Pagnotta (Contact Author)

Imperial College Business School ( email )

Imperial College Business School, Tanaka Building
London, SW7 2AZ
Great Britain
+447478734028 (Phone)

Marius Zoican

Université Paris Dauphine - PSL Research University ( email )

Place du Maréchal de Lattre de Tassigny
Paris cedex 16, 75775
France

HOME PAGE: http://www.mariuszoican.org

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