Spectral risk measures with an application to futures clearinghouse variation margin requirements

John Cotter and Kevin Dowd

Centre for Financial Markets Working Papers from Research Repository, University College Dublin

Abstract: This paper applies an AR(1)-GARCH (1, 1) process to detail the conditional distributions of the return distributions for the S&P500, FT100, DAX, Hang Seng, and Nikkei225 futures contracts. It then uses the conditional distribution for these contracts to estimate spectral risk measures, which are coherent risk measures that reflect a user’s risk-aversion function. It compares these to more familiar VaR and Expected Shortfall (ES) measures of risk, and also compares the precision and discusses the relative usefulness of each of these risk measures in setting variation margins that incorporate time-varying market conditions. The goodness of fit of the model is confirmed by a variety of backtests.

Keywords: Spectral risk measures; Expected shortfall; Value at risk; GARCH; Clearinghouse; Clearinghouses (Banking); Extreme value theory; Risk--Econometric models (search for similar items in EconPapers)
JEL-codes: G15 (search for similar items in EconPapers)
Date: 2006-10
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http://hdl.handle.net/10197/1189 First version, 2006 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:rru:cfmwps:10197/1189

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