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Margin Exceedences for European Stock Index Futures using Extreme Value Theory

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Author Info
Cotter, John

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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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File URL: http://mpra.ub.uni-muenchen.de/3534/
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Publisher Info
Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 3534.

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Date of creation: 2000
Date of revision: 2001
Publication status: Published in Journal of Banking and Finance 8.25(2001): pp. 1475-1502
Handle: RePEc:pra:mprapa:3534

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G00 - Financial Economics - - General - - - General

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. 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. [Downloadable!] (restricted)
  2. John Cotter & Donal G. McKillop, 2000. "The Distributional Characteristics of a Selection of Contracts Traded on the London International Financial Futures Exchange," Journal of Business Finance & Accounting, Blackwell Publishing, vol. 27(3-4), pages 487-510. [Downloadable!] (restricted)
    Other versions:
  3. Pagan, Adrian, 1996. "The econometrics of financial markets," Journal of Empirical Finance, Elsevier, vol. 3(1), pages 15-102, May. [Downloadable!] (restricted)
  4. 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. [Downloadable!] (restricted)
  5. Jón Daníelsson & Casper G. de Vries, 1998. "Value-at-Risk and Extreme Returns," Tinbergen Institute Discussion Papers 98-017/2, Tinbergen Institute. [Downloadable!]
  6. Vries, Caspar de & Danielsson, Jon, 1996. "Tail Index and Quantile Estimation with Very High Frequency Data," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH.
  7. Dewachter, Hans & Gielens, Geert, 1999. "Setting Futures Margins: The Extremes Approach," Applied Financial Economics, Taylor and Francis Journals, vol. 9(2), pages 173-81, April. [Downloadable!] (restricted)
  8. Koedijk, Kees G & Kool, Clemens J M, 1992. "Tail Estimates of East European Exchange Rates," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(1), pages 83-96, January.
  9. Longin, François, 1999. "From Value at Risk to Stress Testing: The Extreme Value Approach," CEPR Discussion Papers 2161, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  10. Hols, Martien C A B & de Vries, Casper G, 1991. "The Limiting Distribution of Extremal Exchange Rate Returns," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 6(3), pages 287-302, July-Sept. [Downloadable!] (restricted)
  11. 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.). [Downloadable!]
  12. Jon Danielsson & Casper G. de Vries, 1998. "Beyond the Sample: Extreme Quantile and Probability Estimation," FMG Discussion Papers dp298, Financial Markets Group. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Raymond Knott & Marco Polenghi, . "Assessing central counterparty margin coverage on futures contracts using GARCH models," Bank of England working papers 287, Bank of England. [Downloadable!]
  2. Cotter, John, 2004. "Modelling extreme financial returns of global equity markets," MPRA Paper 3532, University Library of Munich, Germany. [Downloadable!]
  3. John Cotter, 2005. "Extreme risk in futures contracts," Applied Economics Letters, Taylor and Francis Journals, vol. 12(8), pages 489-492, June. [Downloadable!] (restricted)
  4. Cotter, John & Dowd, Kevin, 2006. "Spectral Risk Measures with an Application to Futures Clearinghouse Variation Margin Requirements," MPRA Paper 3495, University Library of Munich, Germany. [Downloadable!]
  5. Cotter, John, 2004. "Downside Risk for European Equity Markets," MPRA Paper 3537, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  6. Cotter, John, 2004. "Varying the VaR for Unconditional and Conditional Environments," MPRA Paper 3483, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  7. John Cotter, 2004. "Realized volatility and minimum capital requirements," Money Macro and Finance (MMF) Research Group Conference 2003 20, Money Macro and Finance Research Group. [Downloadable!]
  8. John G. Galbraith & Serguei Zernov, 2006. "Extreme Dependence In The Nasdaq And S&P Composite Indexes," Departmental Working Papers 2006-14, McGill University, Department of Economics. [Downloadable!]
  9. Cotter, John, 2004. "Minimum Capital Requirement Calculations for UK Futures," MPRA Paper 3527, University Library of Munich, Germany. [Downloadable!]
  10. Werner, Thomas & Upper, Christian, 2002. "Time Variation in the Tail Behaviour of Bund Futures Returns," Discussion Paper Series 1: Economic Studies 2002,25, Deutsche Bundesbank, Research Centre. [Downloadable!]
  11. Cotter, John, 2007. "Extreme risk in Asian equity markets," MPRA Paper 3536, University Library of Munich, Germany. [Downloadable!]
  12. Cotter, John & Longin, Francois, 2004. "Margin setting with high-frequency data," MPRA Paper 3528, University Library of Munich, Germany, revised 2006. [Downloadable!]
  13. Christian Upper & Thomas Werner, 2002. "Time variation in the tail behaviour of bund futures returns," Working Paper Series 199, European Central Bank. [Downloadable!]
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