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- Title
A THEORETICAL FRAMEWORK TO EVALUATE DIFFERENT MARGIN-SETTING METHODOLOGIES.
- Authors
Kin Lam; Chor-Yiu Sin; Rico Leung, et al
- Abstract
The margin system is the first line of defense against the default risk of a clearinghouse. From the perspectives of a clearinghouse, the utmost concern is to have a prudential system to control the default exposure. Once the level of prudentiality is set, the next concern will be the opportunity cost of the investors, because high opportunity cost discourages people from hedging futures, and thus defeats the functions of a futures market. In this article, we first develop different measures of prudentiality and opportunity cost. We then formulate a statistical framework to evaluate different margin-setting methodologies, all of which strike a balance between prudentiality and opportunity cost. Three margin-setting methodologies namely,(1) using simple moving averages; (2) using exponentially weighted moving averages; (3) using a GARCH approach, are applied to the Hang Seng Index futures. Keeping the same prudentially level, it is shown that the one using a GARCH approach by and large gives the lowest average overcharge.
- Subjects
MARGINS (Futures trading); CLEARINGHOUSES; COST; HEDGING (Finance); FUTURES market; OPPORTUNITY costs
- Publication
Journal of Futures Markets, 2004, Vol 24, Issue 2, p117
- ISSN
0270-7314
- Publication type
Article
- DOI
10.1002/fut.10108