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Setting futures margins: the extremes approach

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  • Hans Dewachter
  • Geert Gielens

Abstract

Using a cost minimizing approach it can be shown that futures margins are set optimally when the cost rate induced by the margin equals the probability of default. Empirically this implies that extreme value analysis should be used since cost rates are, most likely, very small. Application of this approach to NYSE composite futures for the period 1982-1990 shows that actual margins are too invariable and too low, especially before the stock market crash of October 1987.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Financial Economics.

Volume (Year): 9 (1999)
Issue (Month): 2 ()
Pages: 173-181

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Handle: RePEc:taf:apfiec:v:9:y:1999:i:2:p:173-181

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Cited by:
  1. John Cotter, 2006. "Modelling catastrophic risk in international equity markets: an extreme value approach," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 2(1), pages 13-17, January.
  2. Marco Rocco, 2011. "Extreme value theory for finance: a survey," Questioni di Economia e Finanza (Occasional Papers) 99, Bank of Italy, Economic Research and International Relations Area.
  3. 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.
  4. John Cotter, 2005. "Extreme risk in futures contracts," Applied Economics Letters, Taylor & Francis Journals, vol. 12(8), pages 489-492.
  5. Cotter, John, 2001. "Margin exceedences for European stock index futures using extreme value theory," Journal of Banking & Finance, Elsevier, vol. 25(8), pages 1475-1502, August.
  6. 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).
  7. Shanker, Latha & Balakrishnan, Narayanaswamy, 2005. "Optimal clearing margin, capital and price limits for futures clearinghouses," Journal of Banking & Finance, Elsevier, vol. 29(7), pages 1611-1630, July.

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