Margin exceedences for European stock index futures using extreme value theory

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Title: Margin exceedences for European stock index futures using extreme value theory
Authors: Cotter, John
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Date: Aug-2001
Abstract: Futures exchanges require a margin requirement that ensures their competitiveness and protects against default risk. This paper applies extreme value theory in computing unconditional optimal margin levels for a selection of stock index futures traded on European exchanges. The theoretical framework focuses explicitly on tail returns, thereby properly accounting for large levels of risk in measuring prudent margin levels. The paper finds that common margin requirements are sufficient for each contract, with the exception of the Norwegian OBX index, in providing equitable costs for traders. In addition, the paper shows the underestimation bias in margin levels that are calculated assuming normality. Differing margin requirements reflect the unconditional and conditional trading environments.
Type of material: Journal Article
Publisher: Elsevier Science
Copyright (published version): 2001 Elsevier B.V.
Keywords: Stock index futuresExtreme value theoryMargin levels
Subject LCSH: Stock index futures
Extreme value theory
Margins (Security trading)
DOI: 10.1016/S0378-4266(00)00137-0
Language: en
Status of Item: Peer reviewed
Appears in Collections:Business Research Collection

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