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 InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 3534.
Date of creation: 2000
Date of revision: 2001
Publication status: Published in Journal of Banking and Finance 8.25(2001): pp. 1475-1502
Other versions of this item:
- 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.
- G00 - Financial Economics - - General - - - General
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