IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v43y1997i8p1177-1188.html
   My bibliography  Save this article

Prudent Margin Levels in the Finnish Stock Index Futures Market

Author

Listed:
  • G. Geoffrey Booth

    (Department of Finance, Louisiana State University, Baton Rouge, Louisiana 70803)

  • John Paul Broussard

    (School of Business, Rutgers University, Camden, New Jersey 08102)

  • Teppo Martikainen

    (Department of Accounting and Finance, University of Vaasa, P.O. Box 700, FIN-65101 Vaasa, Finland)

  • Vesa Puttonen

    (Department of Accounting and Finance, Helsinki School of Economics and Business Administration, Runeberginkatu 22-24, FIN-00100 Helsinki, Finland)

Abstract

Futures market officials are confronted with the difficult task of setting appropriate margin levels that must balance the costs of trader default and the benefits of increased market liquidity. One way to guard against default is prudent margin setting practices designed to protect futures positions from extreme price movements. The objective of this research is to extrapolate the probabilities of encountering extreme price movements by applying statistical extreme value theory to the Finnish stock index futures market. The extreme value technique is found to be appropriate since it generates theoretical margin violation probabilities that closely follow the empirical probability distribution. The extrapolated results provide decision makers information on extreme events that have not yet occurred.

Suggested Citation

  • 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.
    • Handle: RePEc:inm:ormnsc:v:43:y:1997:i:8:p:1177-1188
    DOI: 10.1287/mnsc.43.8.1177
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mnsc.43.8.1177
    Download Restriction: no
    File URL: https://libkey.io/10.1287/mnsc.43.8.1177?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Cotter, John & Dowd, Kevin, 2006. "Spectral Risk Measures with an Application to Futures Clearinghouse Variation Margin Requirements," MPRA Paper 3495, University Library of Munich, Germany.
    2. 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.
    3. Cruz Lopez, Jorge A. & Harris, Jeffrey H. & Hurlin, Christophe & Pérignon, Christophe, 2017. "CoMargin," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(5), pages 2183-2215, October.
      • Jorge A. Cruz Lopez & Jeffrey H. Harris & Christophe Hurlin & Christophe Pérignon, 2015. "CoMargin," Working Papers halshs-00979440, HAL.
      • Jorge Cruz Lopez & Jeffrey Harris & Christophe Hurlin & Christophe Pérignon, 2017. "CoMargin," Post-Print hal-03579309, HAL.
    4. G. Booth & John Broussard, 1998. "Setting NYSE Circuit Breaker Triggers," Journal of Financial Services Research, Springer;Western Finance Association, vol. 13(3), pages 187-204, June.
    5. Mandeep S. Chahal & Jun Wang, 1997. "Jump Diffusion Processes and Emerging Bond and Stock Markets: An Investigation Using Daily Data," Multinational Finance Journal, Multinational Finance Journal, vol. 1(3), pages 169-197, September.
    6. Alexander, Carol & Kaeck, Andreas & Sumawong, Anannit, 2019. "A parsimonious parametric model for generating margin requirements for futures," European Journal of Operational Research, Elsevier, vol. 273(1), pages 31-43.
    7. Cotter, John & Dowd, Kevin, 2006. "Extreme spectral risk measures: An application to futures clearinghouse margin requirements," Journal of Banking & Finance, Elsevier, vol. 30(12), pages 3469-3485, December.
    8. Cotter, John & Longin, Francois, 2004. "Margin setting with high-frequency data," MPRA Paper 3528, University Library of Munich, Germany, revised 2006.
    9. Colletaz, Gilbert & Hurlin, Christophe & Pérignon, Christophe, 2013. "The Risk Map: A new tool for validating risk models," Journal of Banking & Finance, Elsevier, vol. 37(10), pages 3843-3854.
    10. Shi, Wei & Irwin, Scott H., 2006. "What Happens when Peter can't Pay Paul: Risk Management at Futures Exchange Clearinghouses," 2006 Annual meeting, July 23-26, Long Beach, CA 21087, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    11. Ladley, Daniel & Liu, Guanqing & Rockey, James, 2020. "Losing money on the margin," Journal of Economic Behavior & Organization, Elsevier, vol. 172(C), pages 107-136.
    12. Kuan, Chung-Ming & Yeh, Jin-Huei & Hsu, Yu-Chin, 2009. "Assessing value at risk with CARE, the Conditional Autoregressive Expectile models," Journal of Econometrics, Elsevier, vol. 150(2), pages 261-270, June.
    13. Robert A. Jones & Christophe Pérignon, 2013. "Derivatives Clearing, Default Risk, and Insurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 80(2), pages 373-400, June.
    14. 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.
    15. Broussard, John Paul, 2001. "Extreme-value and margin setting with and without price limits," The Quarterly Review of Economics and Finance, Elsevier, vol. 41(3), pages 365-385.
    16. Lam, Kin & Yu, P.L.H. & Lee, P.H., 2010. "A margin scheme that advises on when to change required margin," European Journal of Operational Research, Elsevier, vol. 207(1), pages 524-530, November.
    17. Selma Chaker & Nour Meddahi, 2013. "CoMargin," Staff Working Papers 13-47, Bank of Canada.
    18. Gong Xue & Songsak Sriboonchitta, 2013. "The optimal margin setting: The application of bivariate EVT method," The Empirical Econometrics and Quantitative Economics Letters, Faculty of Economics, Chiang Mai University, vol. 2(3), pages 56-74, September.
    19. Raymond Knott & Marco Polenghi, 2006. "Assessing central counterparty margin coverage on futures contracts using GARCH models," Bank of England working papers 287, Bank of England.
    20. Chiu, Chien-Liang & Chiang, Shu-Mei & Hung, Jui-Cheng & Chen, Yu-Lung, 2006. "Clearing margin system in the futures markets—Applying the value-at-risk model to Taiwanese data," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 367(C), pages 353-374.
    21. Nikkinen, Jussi, 2003. "Impact of foreign ownership restrictions on stock return distributions: evidence from an option market," Journal of Multinational Financial Management, Elsevier, vol. 13(2), pages 141-159, April.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:43:y:1997:i:8:p:1177-1188. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.