Stock market stress from the central counterparty’s perspective

Barbara Dömötör (Finance Department, Corvinus University of Budapest, Budapest, Hungary)
Kata Váradi (Finance Department, Corvinus University of Budapest, Budapest, Hungary)

Studies in Economics and Finance

ISSN: 1086-7376

Publication date: 30 May 2019



The purpose of this paper is to investigate the possibility of monitoring stress on stock markets from the perspective of a central counterparty (CCP). Due to their balanced positions, CCPs are exposed to extreme price movements in both directions; thus, the major risk for them derives from extreme returns and market illiquidity. The authors examined the connection of the stress alarms of return- and liquidity-based measures to find an objective basis for stress measurement.


The authors defined two types of stress measures: indicators based on extreme returns and liquidity. It is suggested that the stress indicators should be based on the existing risk management methodology that examines different risk measure oversteps. The stress signals of the past nine years on the German stock market were analyzed. The authors investigated the connection between the chosen stress measures to obtain a robust measure for alarming stress.


Although extreme returns and illiquidity are both characteristics of stress, the correlation of returns- and liquidity-based stress indicators is low when taking daily values. On the other hand, the moving averages of the indicators correlate significantly in the case of measures of downward and upward extreme returns and liquidity measured by the relative spread. The results are robust enough to be used for monitoring stress periods.


This paper contributes to understanding the characteristics of stress periods and points to the fact that stress signals measured by different aspects can also differ within the same asset class. The moving averages of returns- and relative spread-based indicators, however, could provide a cost-effective quantitative support for the risk management of a CCP and make the margin calculation predictable for clearing members as well.



Dömötör, B. and Váradi, K. (2019), "Stock market stress from the central counterparty’s perspective", Studies in Economics and Finance, Vol. 36 No. 1, pp. 51-62.

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