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Prudent Margin Levels in the Finnish Stock Index Futures Market

Listed author(s):
  • G. Geoffrey Booth

    (Department of Finance, Louisiana State University, Baton Rouge, Louisiana 70803)

  • John Paul Broussard

    (School of Business, Rutgers University, Camden, New Jersey 08102)

  • Teppo Martikainen

    (Department of Accounting and Finance, University of Vaasa, P.O. Box 700, FIN-65101 Vaasa, Finland)

  • Vesa Puttonen

    (Department of Accounting and Finance, Helsinki School of Economics and Business Administration, Runeberginkatu 22-24, FIN-00100 Helsinki, Finland)

Futures market officials are confronted with the difficult task of setting appropriate margin levels that must balance the costs of trader default and the benefits of increased market liquidity. One way to guard against default is prudent margin setting practices designed to protect futures positions from extreme price movements. The objective of this research is to extrapolate the probabilities of encountering extreme price movements by applying statistical extreme value theory to the Finnish stock index futures market. The extreme value technique is found to be appropriate since it generates theoretical margin violation probabilities that closely follow the empirical probability distribution. The extrapolated results provide decision makers information on extreme events that have not yet occurred.

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Article provided by INFORMS in its journal Management Science.

Volume (Year): 43 (1997)
Issue (Month): 8 (August)
Pages: 1177-1188

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Handle: RePEc:inm:ormnsc:v:43:y:1997:i:8:p:1177-1188
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