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Margin setting with high-frequency data

Author

Listed:
  • 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

    as
    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.
    2. Craine, Roger, 1992. "Are Futures Margins Adequate?," Department of Economics, Working Paper Series qt30c296g3, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    3. 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.
    4. 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.
    5. 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.
    6. Longin, Francois M, 1996. "The Asymptotic Distribution of Extreme Stock Market Returns," The Journal of Business, University of Chicago Press, vol. 69(3), pages 383-408, July.
    7. Jansen, Dennis W & de Vries, Casper G, 1991. "On the Frequency of Large Stock Returns: Putting Booms and Busts into Perspective," The Review of Economics and Statistics, MIT Press, vol. 73(1), pages 18-24, February.
    8. Huisman, Ronald, et al, 2001. "Tail-Index Estimates in Small Samples," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(2), pages 208-216, April.
    9. 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.
    10. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
    11. Hsieh, David A., 1993. "Implications of Nonlinear Dynamics for Financial Risk Management," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(01), pages 41-64, March.
    12. Roger Craine., 1992. "Are Futures Margins Adequate?," Economics Working Papers 92-192, University of California at Berkeley.
    13. Phillip Kearns & Adrian Pagan, 1997. "Estimating The Density Tail Index For Financial Time Series," The Review of Economics and Statistics, MIT Press, vol. 79(2), pages 171-175, May.
    14. 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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    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.

    More about this item

    JEL classification:

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

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