The optimal margin setting: The application of bivariate EVT method

Gong Xue and Songsak Sriboonchitta
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Gong Xue: Chiang Mai University

The Empirical Econometrics and Quantitative Economics Letters, 2013, vol. 2, issue 3, 56 - 74

Abstract: Futures margin setting is important for an exchange policy since it is the balance between the loss and benefit of an exchange. This paper develops a method for setting the margin level for two-commodity portfolios. The bivariate extreme value theory is applied in our estimation to compute the margin level for a given probability of margin failure desired by brokers and exchanges. An empirical study use the return of the seven commodities (indexes) futures in the CBOT Exchange to explain our method, and then the explicit margin levels are given for every portfolio. For our specific example, the comparison of BEVT method, normal distribution and historical data are also provided.

Keywords: Future margins; exchange policy; optimal margin setting; bivariate EVT; commodities (search for similar items in EconPapers)
Date: 2013
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