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Setting the futures margin with price limits: the case for single-stock futures

Author

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  • Chen-Yu Chen

    (Chang Jung Christian University)

  • Jian-Hsin Chou

    (National Kaohsiung First University of Science and Technology)

  • Hung-Gay Fung

    (University of Missouri-St. Louis)

  • Yiuman Tse

    (University of Missouri-St. Louis)

Abstract

Price limits are artificial boundaries established by regulators to establish the maximum price movement permitted in a single day. We propose using a new censoring method that incorporates the effect of price limits on the futures price distribution and investigates how to set an appropriate daily margin level using single-stock futures in Taiwan. We compare our estimations with those obtained using the method in Longin (J Bus 69:383–408, 1999). The results show that (1) the margin levels derived from the Longin method, which ignore price limits in the estimation, are lower than those in our censoring method; and (2) the legal margin for single-stock futures set at 13.5 % by the Taiwan Futures Exchange to avoid default risk appears to be too high.

Suggested Citation

  • 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.
    • Handle: RePEc:kap:rqfnac:v:48:y:2017:i:1:d:10.1007_s11156-015-0548-7
    DOI: 10.1007/s11156-015-0548-7
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    2. Hamed Tabasi & Vahidreza Yousefi & Jolanta Tamošaitienė & Foroogh Ghasemi, 2019. "Estimating Conditional Value at Risk in the Tehran Stock Exchange Based on the Extreme Value Theory Using GARCH Models," Administrative Sciences, MDPI, vol. 9(2), pages 1-17, May.

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    More about this item

    Keywords

    Censoring method; Margin requirement; Price limits; Single-stock futures;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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