Margin setting with high-frequency data

Both in practice and in the academic literature, models for setting margin requirements
in futures markets classically use daily closing price changes. However, as well documented by
research on high-frequency data, financial markets have recently shown high intraday volatility,
which could bring more risk than expected. This paper tries to answer two questions relevant for
margin committees in practice: is it right to compute margin levels based on closing prices and
ignoring intraday dynamics? Is it justified to implement intraday margin calls? The paper
focuses on the impact of intraday dynamics of market prices on daily margin levels. 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.
Our empirical analysis uses the FTSE 100 futures contract traded on LIFFE.

Available on the Munich Personal RePEc Archive, Paper No. 3528