Spectral Risk Measures with an Application to Futures Clearinghouse Variation Margin Requirements

37 Pages Posted: 19 Jun 2007

See all articles by John Cotter

John Cotter

University College Dublin; University of California, Los Angeles (UCLA) - Anderson School of Management

Kevin Dowd

Nottingham University Business School (NUBS)

Date Written: February 21, 2008

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

JEL Classification: G15

Suggested Citation

Cotter, John and Dowd, Kevin, Spectral Risk Measures with an Application to Futures Clearinghouse Variation Margin Requirements (February 21, 2008). AFA 2009 San Francisco Meetings. Available at SSRN: https://ssrn.com/abstract=994508 or http://dx.doi.org/10.2139/ssrn.994508

John Cotter (Contact Author)

University College Dublin ( email )

School of Business, Carysfort Avenue
Blackrock, Co. Dublin
Ireland
353 1 716 8900 (Phone)
353 1 283 5482 (Fax)

HOME PAGE: http://www.ucd.ie/bankingfinance/staff/professorjohncotter/

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Kevin Dowd

Nottingham University Business School (NUBS) ( email )

Jubilee Campus
Wollaton Road
Nottingham, NG8 1BB
United Kingdom

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