Optimal margin level in futures markets: Extreme price movements
✍ Scribed by Longin, Fran�ois M.
- Publisher
- John Wiley and Sons
- Year
- 1999
- Tongue
- English
- Weight
- 272 KB
- Volume
- 19
- Category
- Article
- ISSN
- 0270-7314
No coin nor oath required. For personal study only.
✦ Synopsis
Along with price limits and capital requirements, the margin mechanism ensures the integrity of futures markets. Margin committees and brokers in futures markets face a trade-off when setting the margin level. A high level protects brokers against insolvent customers and thus reinforces market integrity, but it also increases the cost supported by investors and in the end makes the market less attractive.
This article develops a new method for setting the margin level in futures markets. It is based on "extreme value theory," which gives interesting results on the distribution of extreme values of a random process. This extreme value distribution is used to compute the mar-I would like to thank CERESSEC, HEC, FNEGE and the European Union Research Program (EC grant #92-0164) for financial support. Comments by Balbir Bakhshi, Kal Taheem, and Lee Vosper