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Margin exceedences for European stock index futures using extreme value theory

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  • Cotter, John

Abstract

Futures exchanges require a margin requirement that ensures their competitiveness and protects against default risk. This paper applies extreme value theory in computing unconditional optimal margin levels for a selection of stock index futures traded on European exchanges. The theoretical framework focuses explicitly on tail returns, thereby properly accounting for large levels of risk in measuring prudent margin levels. The paper finds that common margin requirements are sufficient for each contract, with the exception of the Norwegian OBX index, in providing equitable costs for traders. In addition, the paper shows the underestimation bias in margin levels that are calculated assuming normality. Differing margin requirements reflect the unconditional and conditional trading environments.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 25 (2001)
Issue (Month): 8 (August)
Pages: 1475-1502

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Handle: RePEc:eee:jbfina:v:25:y:2001:i:8:p:1475-1502

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  7. repec:att:wimass:9208 is not listed on IDEAS
  8. Ghose, Devajyoti & Kroner, Kenneth F., 1995. "The relationship between GARCH and symmetric stable processes: Finding the source of fat tails in financial data," Journal of Empirical Finance, Elsevier, vol. 2(3), pages 225-251, September.
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  15. Paul H. Kupiec & A. Patricia White, 1996. "Regulatory competition and the efficiency of alternative derivative product margining systems," Finance and Economics Discussion Series 96-11, Board of Governors of the Federal Reserve System (U.S.).
  16. Phillip Kearns & Adrian Pagan, 1997. "Estimating The Density Tail Index For Financial Time Series," The Review of Economics and Statistics, MIT Press, vol. 79(2), pages 171-175, May.
  17. Brennan, Michael J., 1986. "A theory of price limits in futures markets," Journal of Financial Economics, Elsevier, vol. 16(2), pages 213-233, June.
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