Optimal Margin Levels for Margin Buying in China: An Extreme Value Method

Hui Hong and Chien-Chiang Lee ()

Emerging Markets Finance and Trade, 2022, vol. 58, issue 9, 2553-2566

Abstract: There are different types of margin requirements for margin buying and this paper focuses on setting both initial and maintenance margin levels. By using the data of stock portfolio returns over the period from March 31, 2010 to December 31, 2020, the research computes and compares margins derived by several margin setting methods using extreme value theory (EVT) for margin buying in China. Important findings are summarized as follows. First, the VaR-x method generates more accurate forecasts of both unconditional and conditional margin levels than the parametric and the Hill non-parametric methods particularly given lower probabilities of margin violation. This is robust to different portfolios, market conditions and sample periods. Second, margins derived actually vary over time, becoming higher (lower) when market volatility increases (decreases). The findings have important economic and practical implications.

Date: 2022
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DOI: 10.1080/1540496X.2021.2002144

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