Margin Requirements with Intraday Dynamics
AbstractBoth in practice and in the academic literature, models for setting margin requirements in futures markets use daily closing price changes. However, financial markets have recently shown high intraday volatility, which could bring more risk than expected. Such a phenomenon is well documented in the literature on high-frequency data and has prompted some exchanges to set intraday margin requirements and ask intraday margin calls. This article proposes to set margin requirements by taking into account the intraday dynamics of market prices. Daily margin levels are obtained in two ways: first, by using daily price changes defined with different time-intervals (say from 3 pm to 3 pm on the following trading day instead of traditional closing times); second, by using 5-minute and 1-hour price changes and scaling the results to one day. An application to the FTSE 100 futures contract traded on LIFFE demonstrates the usefulness of this new approach.
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Bibliographic InfoPaper provided by Geary Institute, University College Dublin in its series Working Papers with number 200519.
Length: 31 pages
Date of creation: 24 Jun 2011
Date of revision:
ARCH process; clearinghouse; exchange; extreme value theory; futures markets; highfrequency data; intraday dynamics; margin requirements; model risk; risk management; stress testing; value at risk.;
Find related papers by JEL classification:
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-07-02 (All new papers)
- NEP-MST-2011-07-02 (Market Microstructure)
- NEP-RMG-2011-07-02 (Risk Management)
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