Margin Setting with High-Frequency Data

33 Pages Posted: 27 Jun 2007

See all articles by John Cotter

John Cotter

University College Dublin; UCLA Anderson School of Management

Francois M. Longin

ESSEC Business School - Finance Department

Date Written: 2006

Abstract

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.

Keywords: clearinghouse, extreme value theory, futures markets, high-frequency data, intraday

JEL Classification: G15

Suggested Citation

Cotter, John and Longin, Francois M., Margin Setting with High-Frequency Data (2006). Available at SSRN: https://ssrn.com/abstract=996082 or http://dx.doi.org/10.2139/ssrn.996082

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/

UCLA Anderson School of Management ( email )

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

Francois M. Longin

ESSEC Business School - Finance Department ( email )

Avenue Bernard Hirsch
BP 105 Cergy Cedex, 95021
France

HOME PAGE: www.longin.fr

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