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Setting futures margins: the extremes approach

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  • Hans Dewachter
  • Geert Gielens

Abstract

Using a cost minimizing approach it can be shown that futures margins are set optimally when the cost rate induced by the margin equals the probability of default. Empirically this implies that extreme value analysis should be used since cost rates are, most likely, very small. Application of this approach to NYSE composite futures for the period 1982-1990 shows that actual margins are too invariable and too low, especially before the stock market crash of October 1987.

Suggested Citation

  • Hans Dewachter & Geert Gielens, 1999. "Setting futures margins: the extremes approach," Applied Financial Economics, Taylor & Francis Journals, vol. 9(2), pages 173-181.
    • Handle: RePEc:taf:apfiec:v:9:y:1999:i:2:p:173-181
    DOI: 10.1080/096031099332438
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    Citations

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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.
    2. Shanker, Latha & Balakrishnan, Narayanaswamy, 2005. "Optimal clearing margin, capital and price limits for futures clearinghouses," Journal of Banking & Finance, Elsevier, vol. 29(7), pages 1611-1630, July.
    3. 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.
    4. Cotter, John, 2006. "Modelling catastrophic risk in international equity markets: An extreme value approach," MPRA Paper 3507, University Library of Munich, Germany.
    5. 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.
    6. Zhiyong Cheng & Jun Deng & Tianyi Wang & Mei Yu, 2021. "Liquidation, leverage and optimal margin in bitcoin futures markets," Applied Economics, Taylor & Francis Journals, vol. 53(47), pages 5415-5428, October.
    7. John Cotter, 2005. "Extreme risk in futures contracts," Applied Economics Letters, Taylor & Francis Journals, vol. 12(8), pages 489-492.
    8. 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.
    9. 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).

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