Back to the future: Futures margins in a future credit default swap index futures market

✍ Scribed by Hans N. E. Byström

• Publisher: John Wiley and Sons
• Year: 2006
• Tongue: English
• Weight: 236 KB
• Volume: 27
• Category: Article
• ISSN: 0270-7314
• DOI: 10.1002/fut.20234

✦ Synopsis

Abstract

The introduction of exchange‐traded credit default swap (CDS) index futures is eminent and this development in the credit market is the subject of this article. A theoretically appealing and practically implementable approach to computing accurate futures margins based on extreme value theory is suggested. The approach is then exemplified with a study of the increasingly popular iTraxx Europe CDS index market. Although this market is not organized through an exchange and is not a futures market, the empirical results together with an arbitrage argument nonetheless suggest margin levels in a future exchange‐traded CDS index futures market computed using extreme value theory to be superior to those computed using the traditional normal distribution or the actual historical distribution. © 2007 Wiley Periodicals, Inc. Jrl Fut Mark 27:85–104, 2007