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Margin exceedences for European stock index futures using extreme value theory

  • Cotter, John

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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Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 25 (2001)
Issue (Month): 8 (August)
Pages: 1475-1502

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Handle: RePEc:eee:jbfina:v:25:y:2001:i:8:p:1475-1502
Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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  14. Paul H. Kupiec & Patricia A. 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.).
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  16. Hans Dewachter & Geert Gielens, 1999. "Setting futures margins: the extremes approach," Applied Financial Economics, Taylor & Francis Journals, vol. 9(2), pages 173-181.
  17. Longin, François, 1999. "From Value at Risk to Stress Testing: The Extreme Value Approach," CEPR Discussion Papers 2161, C.E.P.R. Discussion Papers.
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