Valuing the Futures Market Clearinghouse's Default Exposure during the 1987 Crash

Abstract

Futures market clearinghouses are intermediaries that make large-volume trading between anonymous parties feasible. During the market crash in October 1987 rumors spread that a clearinghouse might fail. This paper presents estimates of three measures of the default exposure. We estimate the traditional summary statistic for risk exposure: the tail probabilities. We also estimate two economic measures: the expected value of the payoffs in the tails, and expected value of the payoffs in the tails conditional on landing in the rail. Our estimates indicate the market thought another crash was unlikely, but that if one occurred it would be large.