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Spectral risk measures with an application to futures clearinghouse variation margin requirements

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  • John Cotter
  • Kevin Dowd

Abstract

This paper applies an AR(1)-GARCH (1, 1) process to detail the conditional distributions of the return distributions for the S&P500, FT100, DAX, Hang Seng, and Nikkei225 futures contracts. It then uses the conditional distribution for these contracts to estimate spectral risk measures, which are coherent risk measures that reflect a user’s risk-aversion function. It compares these to more familiar VaR and Expected Shortfall (ES) measures of risk, and also compares the precision and discusses the relative usefulness of each of these risk measures in setting variation margins that incorporate time-varying market conditions. The goodness of fit of the model is confirmed by a variety of backtests.

Suggested Citation

  • John Cotter & Kevin Dowd, 2006. "Spectral risk measures with an application to futures clearinghouse variation margin requirements," Centre for Financial Markets Working Papers 10197/1189, Research Repository, University College Dublin.
    • Handle: RePEc:rru:cfmwps:10197/1189
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    File URL: http://hdl.handle.net/10197/1189
    File Function: First version, 2006
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    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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