Margin Requirements with Intraday Dynamics

John Cotter and Francois Longin
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Francois Longin: ESSEC Graduate Business School, France

No 200519, Working Papers from Geary Institute, University College Dublin

Abstract: Both in practice and in the academic literature, models for setting margin requirements in futures markets use daily closing price changes. However, financial markets have recently shown high intraday volatility, which could bring more risk than expected. Such a phenomenon is well documented in the literature on high-frequency data and has prompted some exchanges to set intraday margin requirements and ask intraday margin calls. This article proposes to set margin requirements by taking into account the intraday dynamics of market prices. Daily margin levels are obtained in two ways: first, by using daily price changes defined with different time-intervals (say from 3 pm to 3 pm on the following trading day instead of traditional closing times); second, by using 5-minute and 1-hour price changes and scaling the results to one day. An application to the FTSE 100 futures contract traded on LIFFE demonstrates the usefulness of this new approach.

Keywords: ARCH process; clearinghouse; exchange; extreme value theory; futures markets; highfrequency data; intraday dynamics; margin requirements; model risk; risk management; stress testing; value at risk. (search for similar items in EconPapers)
JEL-codes: G15 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2011-06-24
New Economics Papers: this item is included in nep-mst and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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