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- Title
Setting the futures margin with price limits: the case for single-stock futures.
- Authors
Chen, Chen-Yu; Chou, Jian-Hsin; Fung, Hung-Gay; Tse, Yiuman
- Abstract
Price limits are artificial boundaries established by regulators to establish the maximum price movement permitted in a single day. We propose using a new censoring method that incorporates the effect of price limits on the futures price distribution and investigates how to set an appropriate daily margin level using single-stock futures in Taiwan. We compare our estimations with those obtained using the method in Longin (J Bus 69:383-408, 1999). The results show that (1) the margin levels derived from the Longin method, which ignore price limits in the estimation, are lower than those in our censoring method; and (2) the legal margin for single-stock futures set at 13.5 % by the Taiwan Futures Exchange to avoid default risk appears to be too high.
- Subjects
STOCKS (Finance); MARGIN requirements; STOCK exchanges; COUNTERPARTY risk; FINANCIAL research
- Publication
Review of Quantitative Finance & Accounting, 2017, Vol 48, Issue 1, p219
- ISSN
0924-865X
- Publication type
Article
- DOI
10.1007/s11156-015-0548-7