Cotter, John and Longin, Francois (2004): Margin setting with high-frequency data.
Download (277Kb) | Preview
Both in practice and in the academic literature, models for setting margin requirements in futures markets classically use daily closing price changes. However, as well documented by research on high-frequency data, financial markets have recently shown high intraday volatility, which could bring more risk than expected. This paper tries to answer two questions relevant for margin committees in practice: is it right to compute margin levels based on closing prices and ignoring intraday dynamics? Is it justified to implement intraday margin calls? The paper focuses on the impact of intraday dynamics of market prices on daily margin levels. Daily margin levels are obtained in two ways: first, by using daily price changes defined with different time-intervals (say from 3 pm to 3 pm on the following trading day instead of traditional closing times); second, by using 5-minute and 1-hour price changes and scaling the results to one day. Our empirical analysis uses the FTSE 100 futures contract traded on LIFFE.
|Item Type:||MPRA Paper|
|Original Title:||Margin setting with high-frequency data|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G10 - General|
|Depositing User:||John Cotter|
|Date Deposited:||12. Jun 2007|
|Last Modified:||16. Feb 2013 18:51|
21 References: Bollerslev, T., Chou, R.Y. Kroner, K.F., 1992. ARCH Modeling in Finance: A Review of the Theory and Empirical Evidence, Journal of Econometrics, 52, 5-59. Bollerslev T., Cai, J., Song, F.M., 2000. Intraday Periodicity, Long Memory Volatility, and Macroeconomic Announcement Effects in the US Treasury Bond Market, Journal of Empirical Finance, 7, 37-55. Booth G.G., Broussard, J.P., Martikainen, T, Puttonen, V., 1997. Prudent Margin Levels in the Finnish Stock Index Market, Management Science, 43, 1177-1188. Brennan, M.J., 1986. A Theory of Price Limits in Futures Markets, Journal of Financial Economics, 16, 213-233. Brenner T.W., 1981. Margin Authority: No Reason for a Change, Journal of Futures Markets, 1, 487–490. Cotter J., 2001. Margin Exceedances for European Stock Index Futures using Extreme Value Theory, Journal of Banking and Finance, 25, 1475-1502. Cotter J., 2004. Minimum Capital Requirement Calculations for UK Futures, Journal of Futures Markets, 24, 193-220. Craine R., 1992. Are Futures Margins Adequate ?, Working Paper, University of California – Berkley. Dacarogna M.M., Pictet, O.V., Muller, U. A., de Vries, C.G., 1995. Extremal Forex Returns in Extremely Large Data Sets, Mimeo, Tinbergen Institute. Danielson J., de Haan, L., Peng, L., de Vries, C.J., 2001. Using a Bootstrap Method to Choose the Sample Fraction in Tail Index Estimation, Journal of Multivariate Analysis, 76, 226-248. Day T.E. Lewis, C.M., 1999. Margin Adequacy and Standards: An Analysis of the Crude Oil Futures Markets, Working Paper, Owen Graduate School of Management, Vanderbilt University. Edwards F.R., Neftci, S.N., 1988. Extreme Price Movements and Margin Levels in Futures Markets, Journal of Futures Markets, 8, 639-655. Feller W., 1971. An Introduction to Probability Theory and its Applications, John Wiley, New York. Figlewski S., 1984. Margins and Market Integrity: Margin Setting for Stock Index Futures and Options, Journal of Futures Markets, 4, 385–416. Gay G.D., Hunter, W.C., Kolb, R.W., 1986. A Comparative Analysis of Futures Contract Margins, Journal of Futures Markets, 6, 307–324. De Haan L.S., Jansen, D.W., Koedijk, K., de Vries, C.G., 1994. Safety First Portfolio Selection, Extreme Value Theory and Long Run Asset Risks, in Galambos, C. (Ed.), Proceedings from a Conference on Extreme Value Theory and Applications. Kluwer Academic Publishing, Dordrecht, 471–487. Hall P., Welsh, A., 1984. Best Attainable Rates of Convergence for Estimates of Parameters of Regular Variation, Annals of Statistics, 12, 1072-1084. 22 Hsieh D.A., 1991. Chaos and Nonlinear Dynamics: Application to Financial Markets, Journal of Finance, 46, 1839-1877. Hsieh D.A., 1993. Implications of Nonlinear Dynamics for Financial Risk Management, Journal of Financial and Quantitative Analysis, 28, 41-64. Huisman R., Koedijk, K., Kool, C.J.M., Palm, F., 2001. Tail Index Estimates in Small Samples, Journal of Business and Economic Statistics, 19, 208-215. Jansen D.W., De Vries C.G., 1991. On the Frequency of Large Stock Returns: Putting Booms and Busts into Perspectives, Review of Economics and Statistics, 73, 18-24. Kearns P., Pagan, A., 1997. Estimating the Density Tail Index for Financial Time Series, Review of Economics and Statistics, 79, 171-175. Kofman P., 1993. Optimizing Futures Margins with Distribution Tails, Advances in Futures and Options Research, 6, 263–278. London Clearing House, 2002, Market Protection, The role of LCH: regulatory framework, structure and governance, legal and contractual obligations, risk management, default rules, financial backing. London: LCH. Longin F.M., 1996. The Asymptotic Distribution of Extreme Stock Market Returns, Journal of Business, 63, 383-408. Longin F.M., 1999. Optimal Margin Levels in Futures Markets: Extreme Price Movements, Journal of Futures Markets, 19, 127-152. Longin F.M., 2000. From Value at Risk to Stress Testing: The Extreme Value Approach, Journal of Banking and Finance, 24, 1097-1130. Merton R.C., 1980. On Estimating the Expected Return on the Market, Journal of Financial Economics, 8, 323-361. Warshawsky M.J., 1989. The Adequacy and Consistency of Margin Requirements: The Cash, Futures and Options Segments of the Equity Markets, Review of Futures Markets, 8, 420-437.