Margin exceedences for European stock index futures using extreme value theory
AbstractFutures 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 InfoArticle provided by Elsevier in its journal Journal of Banking & Finance.
Volume (Year): 25 (2001)
Issue (Month): 8 (August)
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Web page: http://www.elsevier.com/locate/jbf
Other versions of this item:
- Cotter, John, 2000. "Margin Exceedences for European Stock Index Futures using Extreme Value Theory," MPRA Paper 3534, University Library of Munich, Germany, revised 2001.
- Cotter, John, 2001. "Margin exceedences for European stock index futures using extreme value theory," Open Access publications from University College Dublin urn:hdl:10197/1620, University College Dublin.
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
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