System and method for determining the market risk margin requirements associated with a credit default swap
First Claim
1. A computer-implemented method for determining a margin requirement associated with a portfolio comprising one or more positions with respect to a plurality of financial instruments, the method comprising:
- computing, by a processor, the margin requirement based on a risk value computed as a function of a distribution of a plurality of portfolio profit and loss (“
PNL”
) scenarios, each PNL scenario being based on an aggregate difference between a current price of each of the plurality of financial instruments of the portfolio and a simulated price thereof determined as a function of a plurality of simulated residuals generated based on a plurality of standardized residuals calculated based on a modeling of volatility of an estimate to which a known time-series of returns associated with each of the plurality of financial instruments is predictive of a subsequent time series of returns therefore.
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Abstract
Determination of a margin requirement associated with a plurality of financial instruments within a portfolio is disclosed for analyzing the portfolio including determining a first and second time-series of returns for the financial instruments, where the second time-series occurs after the first, and calculating the correlation between the first and second time-series of returns. The system and method further implement calculating residuals and volatilities for the financial instruments within the portfolio as a function of the first time-series of returns, calculating a correlation matrix and degrees-of-freedom utilized to simulate standardized residuals for each of the financial instruments within the portfolio, generating simulated returns as a function of the simulated standardized residuals and the returns, generating a spread distribution for the portfolio, wherein the portfolio is repriced as a function of the simulated returns, and calculating a margin risk based on a risk percentile associated with the spread distribution.
61 Citations
21 Claims
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1. A computer-implemented method for determining a margin requirement associated with a portfolio comprising one or more positions with respect to a plurality of financial instruments, the method comprising:
computing, by a processor, the margin requirement based on a risk value computed as a function of a distribution of a plurality of portfolio profit and loss (“
PNL”
) scenarios, each PNL scenario being based on an aggregate difference between a current price of each of the plurality of financial instruments of the portfolio and a simulated price thereof determined as a function of a plurality of simulated residuals generated based on a plurality of standardized residuals calculated based on a modeling of volatility of an estimate to which a known time-series of returns associated with each of the plurality of financial instruments is predictive of a subsequent time series of returns therefore.- View Dependent Claims (2, 3, 4, 5, 6, 7, 8)
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9. A computer-implemented method for determining a margin requirement associated with a portfolio comprising a plurality of credit default swap instruments, the method comprising:
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determining a correlated time-series of returns based on a pair of time-series of returns, each captured at a different time, for the plurality of credit default swap instruments; analyzing the correlated time-series of returns based on a time-series of expected returns for each of the credit default swap instruments in the portfolio generated from an autoregression model; calculating one or more residuals and volatilities associated with the time-series of expected returns for each of the credit default swap instruments in the portfolio based on a Glosten-Jagannathan-Runkle generalized autoregressive conditional heteroskedasticity (“
GJR-GARCH”
) model to simulate noise associated with each of the one or more residuals;standardizing the one or more residuals and volatilities; applying an autocorrelation function to the standardized residuals and a square of the standardized residuals; calibrating a student-t copula to the correlated standardized residuals determined by the autocorrelation function to generate a correlation matrix and degrees-of-freedom in order to simulate standardized residuals for each of the plurality of financial instruments within the portfolio; generating simulated returns as a function of the simulated standardized residuals and the simulated noise; generating a spread distribution for the portfolio, wherein the portfolio is iteratively repriced as a function of the simulated returns; and calculating a margin risk based on a risk percentile associated with the spread distribution; and wherein the marging requirement is determined based on the margin risk. - View Dependent Claims (10, 11, 12, 13, 14, 15)
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16. A system for determining a margin requirement associated with a plurality of credit derivatives within a portfolio, the system comprising:
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a processor; a memory in communication with the processor, wherein the memory is configured to stored processor-executable instructions to; compute the margin requirement based on a risk value computed as a function of a distribution of a plurality of portfolio profit and loss (“
PNL”
) scenarios, each PNL scenario being based on an aggregate difference between a current price of each of the plurality of financial instruments of the portfolio and a simulated price thereof determined as a function of a plurality of simulated residuals generated based on a plurality of standardized residuals calculated based on a modeling of volatility of an estimate to which a known time-series of returns associated with each of the plurality of financial instruments is predictive of a subsequent time series of returns therefore. - View Dependent Claims (17, 18, 19, 20, 21)
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Specification