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Margin setting with high-frequency data

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  • Cotter, John
  • Longin, Francois

Abstract

Both in practice and in the academic literature, models for setting margin requirements in futures markets classically use daily closing price changes. However, as well documented by research on high-frequency data, financial markets have recently shown high intraday volatility, which could bring more risk than expected. This paper tries to answer two questions relevant for margin committees in practice: is it right to compute margin levels based on closing prices and ignoring intraday dynamics? Is it justified to implement intraday margin calls? The paper focuses on the impact of intraday dynamics of market prices on daily margin levels. 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. Our empirical analysis uses the FTSE 100 futures contract traded on LIFFE.

Suggested Citation

  • Cotter, John & Longin, Francois, 2004. "Margin setting with high-frequency data," MPRA Paper 3528, University Library of Munich, Germany, revised 2006.
  • Handle: RePEc:pra:mprapa:3528
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    File URL: https://mpra.ub.uni-muenchen.de/3528/1/MPRA_paper_3528.pdf
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    References listed on IDEAS

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    1. Brennan, Michael J., 1986. "A theory of price limits in futures markets," Journal of Financial Economics, Elsevier, vol. 16(2), pages 213-233, June.
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    4. John Cotter, 2004. "Minimum capital requirement calculations for UK futures," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 24(2), pages 193-220, February.
    5. Roger Craine., 1992. "Are Futures Margins Adequate?," Economics Working Papers 92-192, University of California at Berkeley.
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    7. Longin, Francois M., 2000. "From value at risk to stress testing: The extreme value approach," Journal of Banking & Finance, Elsevier, vol. 24(7), pages 1097-1130, July.
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    10. Cotter, John, 2001. "Margin exceedences for European stock index futures using extreme value theory," Journal of Banking & Finance, Elsevier, vol. 25(8), pages 1475-1502, August.
    11. Hsieh, David A, 1991. "Chaos and Nonlinear Dynamics: Application to Financial Markets," Journal of Finance, American Finance Association, vol. 46(5), pages 1839-1877, December.
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    Cited by:

    1. Marco Rocco, 2011. "Extreme value theory for finance: a survey," Questioni di Economia e Finanza (Occasional Papers) 99, Bank of Italy, Economic Research and International Relations Area.
    2. Chen-Yu Chen & Jian-Hsin Chou & Hung-Gay Fung & Yiuman Tse, 2017. "Setting the futures margin with price limits: the case for single-stock futures," Review of Quantitative Finance and Accounting, Springer, vol. 48(1), pages 219-237, January.

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    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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