Persistence and Procyclicality in Margin Requirements

41 Pages Posted: 21 Mar 2017

See all articles by Paul Glasserman

Paul Glasserman

Columbia Business School

Qi Wu

City University of Hong Kong, School of Data Science

Date Written: February 21, 2017


Margin requirements for derivative contracts serve as a buffer against the transmission of losses through the financial system by protecting one party to a contract against default by the other party. However, if margin levels are proportional to volatility, then a spike in volatility leads to potentially destabilizing margin calls in times of market stress. Risk-sensitive margin requirements are thus procyclical in the sense that they amplify shocks. We use a GARCH model of volatility and a combination of theoretical and empirical results to analyze how much higher margin levels need to be to avoid procyclicality while reducing counterparty credit risk. Our analysis compares the tail decay of conditional and unconditional loss distributions to compare stable and risk-sensitive margin requirements. Greater persistence and burstiness in volatility leads to a slower decay in the tail of the unconditional distribution and a higher buffer needed to avoid procyclicality. The tail decay drives other measures of procyclicality as well. Our analysis points to important features of price time series that should inform “anti-procyclicality” measures but are missing from current rules.

Keywords: central counterparties, risk-sensitive margin requirements, procyclicality

JEL Classification: G21, G28, G230

Suggested Citation

Glasserman, Paul and Wu, Qi, Persistence and Procyclicality in Margin Requirements (February 21, 2017). OFR WP 17-01, Columbia Business School Research Paper No. 17-34, Available at SSRN: or

Paul Glasserman (Contact Author)

Columbia Business School ( email )

3022 Broadway
403 Uris Hall
New York, NY 10027
United States
212-854-4102 (Phone)
212-316-9180 (Fax)

Qi Wu

City University of Hong Kong, School of Data Science ( email )

83 Tat Chee Avenue
Hong Kong

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