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

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