Advanced Search
MyIDEAS: Login to save this article or follow this journal

A margin scheme that advises on when to change required margin

Contents:

Author Info

  • Lam, Kin
  • Yu, P.L.H.
  • Lee, P.H.

Abstract

The purpose of a margin requirement is to protect a clearinghouse from members' defaults resulting from big losses due to adverse movement of futures prices. To decide on how much a margin is required, a clearinghouse may refer to a benchmark margin defined as a constant multiple of the forecasted volatility. However, a benchmark margin only advises on a desirable margin level. It gives no advice on whether a clearinghouse should alter existing required margin. This paper proposes a margin scheme that can advise on when to change the required margin and if a change is recommended, to what level it should be changed. The proposed margin scheme can be devised so that the coverage probability and change frequency are controlled at target levels deemed appropriate by the clearinghouse. The proposed margin scheme needs a volatility forecast as input. This paper shows that among a large number of volatility forecasts, implied volatility gives the best results. This confirms a conjecture that implied volatility may have more information content than other volatility forecasts as far as margin setting is concerned.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.sciencedirect.com/science/article/B6VCT-500SJVM-1/2/a35e75357fa4309657264cd6159376b1
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Article provided by Elsevier in its journal European Journal of Operational Research.

Volume (Year): 207 (2010)
Issue (Month): 1 (November)
Pages: 524-530

as in new window
Handle: RePEc:eee:ejores:v:207:y:2010:i:1:p:524-530

Contact details of provider:
Web page: http://www.elsevier.com/locate/eor

Related research

Keywords: Margin in futures market Clearinghouse Volatility forecasts GARCH model Implied volatility;

References

No references listed on IDEAS
You can help add them by filling out this form.

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:eee:ejores:v:207:y:2010:i:1:p:524-530. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.