Article1997

Prudent Margin Levels in the Finnish Stock Index Futures Market

G. Geoffrey Booth · John Paul Broussard · Teppo Martikainen · Vesa Puttonen A

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Financial Risk and Volatility Modeling Financial Markets and Investment Strategies Stochastic processes and financial applications

Abstract

Futures market officials are confronted with the difficult task of setting appropriate margin levels that must balance the costs of trader default and the benefits of increased market liquidity. One way to guard against default is prudent margin setting practices designed to protect futures positions from extreme price movements. The objective of this research is to extrapolate the probabilities of encountering extreme price movements by applying statistical extreme value theory to the Finnish stock index futures market. The extreme value technique is found to be appropriate since it generates theoretical margin violation probabilities that closely follow the empirical probability distribution. The extrapolated results provide decision makers information on extreme events that have not yet occurred.

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References

1996The Asymptotic Distribution of Extreme Stock Market Returns 1989On the Frequency of Large Stock Returns: Putting Booms and Busts into Perspective 1989Extremal behaviour of solutions to a stochastic difference equation with applications to arch processes 1981Why There Are Organized Futures Markets 1984Margins and market integrity: Margin setting for stock index futures and options 1981Margins and futures contracts 1992Differences between foreign exchange rate regimes: The view from the tails 1986A comparative analysis of futures contract margins

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2001Beyond the VaR 2012Derivatives Clearing, Default Risk, and Insurance 2001Extreme-value and margin setting with and without price limits 2007Extreme Spectral Risk Measures: An Application to Futures Clearinghouse Margin Requirements

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