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Prudent Margin Levels in the Finnish Stock Index Futures Market

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Author Info

  • G. Geoffrey Booth

    (Department of Finance, Louisiana State University, Baton Rouge, Louisiana 70803)

  • John Paul Broussard

    (School of Business, Rutgers University, Camden, New Jersey 08102)

  • Teppo Martikainen

    (Department of Accounting and Finance, University of Vaasa, P.O. Box 700, FIN-65101 Vaasa, Finland)

  • Vesa Puttonen

    (Department of Accounting and Finance, Helsinki School of Economics and Business Administration, Runeberginkatu 22-24, FIN-00100 Helsinki, Finland)

Abstract

Futures market officials are confronted with the difficult task of setting appropriate margin levels that must balance the costs of trader default and the benefits of increased market liquidity. One way to guard against default is prudent margin setting practices designed to protect futures positions from extreme price movements. The objective of this research is to extrapolate the probabilities of encountering extreme price movements by applying statistical extreme value theory to the Finnish stock index futures market. The extreme value technique is found to be appropriate since it generates theoretical margin violation probabilities that closely follow the empirical probability distribution. The extrapolated results provide decision makers information on extreme events that have not yet occurred.

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File URL: http://dx.doi.org/10.1287/mnsc.43.8.1177
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Bibliographic Info

Article provided by INFORMS in its journal Management Science.

Volume (Year): 43 (1997)
Issue (Month): 8 (August)
Pages: 1177-1188

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Handle: RePEc:inm:ormnsc:v:43:y:1997:i:8:p:1177-1188

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Related research

Keywords: stock index futures; margin setting; extreme value statistics;

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Citations

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Cited by:
  1. John Cotter & Kevin Dowd, 2011. "Spectral Risk Measures with an Application to Futures Clearinghouse Variation Margin Requirements," Working Papers 200616, Geary Institute, University College Dublin.
  2. G. Booth & John Broussard, 1998. "Setting NYSE Circuit Breaker Triggers," Journal of Financial Services Research, Springer, vol. 13(3), pages 187-204, June.
  3. Nikkinen, Jussi, 2003. "Impact of foreign ownership restrictions on stock return distributions: evidence from an option market," Journal of Multinational Financial Management, Elsevier, vol. 13(2), pages 141-159, April.
  4. John Cotter & Kevin Dowd, 2011. "Extreme Spectral Risk Measures: An Application to Futures Clearinghouse Margin Requirements," Working Papers 200516, Geary Institute, University College Dublin.
  5. Cotter, John, 2000. "Margin Exceedences for European Stock Index Futures using Extreme Value Theory," MPRA Paper 3534, University Library of Munich, Germany, revised 2001.
  6. Raymond Knott & Marco Polenghi, 2006. "Assessing central counterparty margin coverage on futures contracts using GARCH models," Bank of England working papers 287, Bank of England.
  7. Cotter, John & Longin, Francois, 2004. "Margin setting with high-frequency data," MPRA Paper 3528, University Library of Munich, Germany, revised 2006.
  8. Gilbert Colletaz & Christophe Hurlin & Christophe Pérignon, 2012. "The Risk Map: A New Tool for Validating Risk Models," Working Papers halshs-00746273, HAL.
  9. Shi, Wei & Irwin, Scott H., 2006. "What Happens when Peter can't Pay Paul: Risk Management at Futures Exchange Clearinghouses," 2006 Annual meeting, July 23-26, Long Beach, CA 21087, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  10. Broussard, John Paul, 2001. "Extreme-value and margin setting with and without price limits," The Quarterly Review of Economics and Finance, Elsevier, vol. 41(3), pages 365-385.
  11. Kuan, Chung-Ming & Yeh, Jin-Huei & Hsu, Yu-Chin, 2009. "Assessing value at risk with CARE, the Conditional Autoregressive Expectile models," Journal of Econometrics, Elsevier, vol. 150(2), pages 261-270, June.
  12. Jorge Cruz Lopez & Jeffrey Harris & Christophe Hurlin & Christophe Pérignon, 2014. "CoMargin," Working Papers halshs-00979440, HAL.
  13. Gong Xue & Songsak Sriboonchitta, 2013. "The optimal margin setting: The application of bivariate EVT method," The Empirical Econometrics and Quantitative Economics Letters, Faculty of Economics, Chiang Mai University, vol. 2(3), pages 56 - 74, September.

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