Price Volatility and Futures Margins

Futures exchanges raise margins in environments characterized by recent substantial increases in futures price volatility, and they raise margins in contracts that have recently shown the largest volatility increase. Volatility then tends to fall. This reduction is smaller - especially the troublesome jump component of volatility that is derived from a Poisson jump-diffusion process of futures daily returns - when the earlier margin increase is larger. The exchanges appear to raise margins when they perceive the earlier volatility increase to be more permanent. Conversely, exchanges reduce margins after an earlier decrease in volatility, but they seem anxious to reduce margins well before volatility has bottomed out. After the margin reduction, volatility continues to decline and by a greater amount for the cases when the earlier reduction in margins was larger.