Tuesday, September 6th @ 11:00-12:30 PM (639 Evans Hall)
Stochastic Intensity Margin Modeling of Credit Default Swap Portfolios
Baeho Kim, Korea University Business School
Abstract: We consider the problem of initial margin (IM) modeling for portfolios of credit default swaps (CDS) from the perspective of a derivatives Central Counterparty (CCP). The CCPs' IM models in practice are based on theoretically-unfounded direct statistical modeling of CDS spreads. Using a reduced-form approach, our IM model based on stochastic default intensity prices the portfolio constituents in a theoretically meaningful way and shows that statistical IM models can underestimate CCPs' collateral requirements. In addition, our proposed Affine jump-diffusion intensity modeling approach illustrates that a counter-cyclical IM scheme can be implemented from a macro-prudential perspective. This is joint work with Samim Ghamami (Office of Financial Research) and Dong Hwan Oh (Federal Reserve Board).