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Margin Requirements with Intraday Dynamics

Author

Listed:
  • John Cotter

    (University College Dublin, Ireland)

  • Francois Longin

    (ESSEC Graduate Business School, France)

Abstract

Both in practice and in the academic literature, models for setting margin requirements in futures markets use daily closing price changes. However, financial markets have recently shown high intraday volatility, which could bring more risk than expected. Such a phenomenon is well documented in the literature on high-frequency data and has prompted some exchanges to set intraday margin requirements and ask intraday margin calls. This article proposes to set margin requirements by taking into account the intraday dynamics of market prices. 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. An application to the FTSE 100 futures contract traded on LIFFE demonstrates the usefulness of this new approach.

Suggested Citation

  • John Cotter & Francois Longin, 2011. "Margin Requirements with Intraday Dynamics," Working Papers 200519, Geary Institute, University College Dublin.
  • Handle: RePEc:ucd:wpaper:2005/19
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    File URL: http://www.ucd.ie/geary/static/publications/workingpapers/gearywp200519.pdf
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    References listed on IDEAS

    as
    1. Drost, Feike C & Nijman, Theo E, 1993. "Temporal Aggregation of GARCH Processes," Econometrica, Econometric Society, vol. 61(4), pages 909-927, July.
    2. Danielsson, J. & de Haan, L. & Peng, L. & de Vries, C. G., 2001. "Using a Bootstrap Method to Choose the Sample Fraction in Tail Index Estimation," Journal of Multivariate Analysis, Elsevier, vol. 76(2), pages 226-248, February.
    3. 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.
    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. 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.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    ARCH process; clearinghouse; exchange; extreme value theory; futures markets; highfrequency data; intraday dynamics; margin requirements; model risk; risk management; stress testing; value at risk.;

    JEL classification:

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

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