Margin requirements with intraday dynamics

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Title: Margin requirements with intraday dynamics
Authors: Cotter, John
Longin, François
Permanent link: http://hdl.handle.net/10197/1162
Date: 14-Jun-2004
Abstract: Both in practice and in the academic literature, models for setting margin requirements in futures markets use daily closing price changes. However, financial markets have recently shown high intraday volatility, which could bring more risk than expected. Such a phenomenon is well documented in the literature on high-frequency data and has prompted some exchanges to set intraday margin requirements and ask intraday margin calls. This article proposes to set margin requirements by taking into account the intraday dynamics of market prices. 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. An application to the FTSE 100 futures contract traded on LIFFE demonstrates the usefulness of this new approach.
Funding Details: University College Dublin. Michael Smurfit Graduate School of Business
Type of material: Working Paper
Publisher: University College Dublin. School of Business. Centre for Financial Markets
Copyright (published version): 2004, Centre for Financial Markets
Keywords: ARCH process;Clearinghouse;Extreme value theory;Futures markets;High frequency data;Intraday dynamics
Subject LCSH: Futures--Econometric models
Clearinghouses (Banking)
Extreme value theory
Language: en
Status of Item: Not peer reviewed
Appears in Collections:Centre for Financial Markets Working Papers

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