How do risk attitudes of clearing firms matter for managing default exposure in futures markets?

This article proposes a theoretical framework that is built upon extreme value theory to study three instruments (i.e. margin, capital requirement and price limits) for managing default risk in futures markets. Specifically, the exceedances over a price threshold are modeled using a generalized Pareto distribution, and the models are static (one-period). We incorporate the risk attitudes of clearing firms into the framework to investigate the efficacy of these instruments under several risk measures, including value-at-risk measures, expected-shortfall measures and spectral risk measures. An empirical study on the VIX futures (or VX) data shows that the effectiveness of these market instruments rests not only on clearing firms' risk attitudes, but also on the tail fatness of the futures price distribution. Moreover, the shift in the risk attitudes of clearing firms may cause interactions among these instruments, which casts new light on the economic rationale of price limits.