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The optimal margin setting: The application of bivariate EVT method

Author

Listed:
  • Gong Xue

    (Chiang Mai University)

  • Songsak Sriboonchitta

    (Chiang Mai University)

Abstract

Futures margin setting is important for an exchange policy since it is the balance between the loss and benefit of an exchange. This paper develops a method for setting the margin level for two-commodity portfolios. The bivariate extreme value theory is applied in our estimation to compute the margin level for a given probability of margin failure desired by brokers and exchanges. An empirical study use the return of the seven commodities (indexes) futures in the CBOT Exchange to explain our method, and then the explicit margin levels are given for every portfolio. For our specific example, the comparison of BEVT method, normal distribution and historical data are also provided.

Suggested Citation

  • 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.
    • Handle: RePEc:chi:journl:v:2:y:2013:i:3:p:56-74
    as

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    References listed on IDEAS

    as
    1. Gikas A. Hardouvelis & Stavros Peristiani, 1992. "Margin Requirements, Speculative Trading, and Stock Price Fluctuations: The Case of Japan," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(4), pages 1333-1370.
    2. G. Geoffrey Booth & John Paul Broussard & Teppo Martikainen & Vesa Puttonen, 1997. "Prudent Margin Levels in the Finnish Stock Index Futures Market," Management Science, INFORMS, vol. 43(8), pages 1177-1188, August.
    3. François M. Longin, 1999. "Optimal margin level in futures markets: Extreme price movements," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 19(2), pages 127-152, April.
    4. Franklin R. Edwards & Salih N. Neftci, 1988. "Extreme price movements and margin levels in futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 8(6), pages 639-655, December.
    Full references (including those not matched with items on IDEAS)

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