A parsimonious parametric model for generating margin requirements for futures

Alexander, Carol, Kaeck, Andreas and Sumawong, Anannit (2019) A parsimonious parametric model for generating margin requirements for futures. European Journal of Operational Research, 273 (1). pp. 31-43. ISSN 0377-2217

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Major exchanges employ the Standard Portfolio Analysis of Risk (SPAN) software to measure maintenance margins. However, its methodology has become cumbersome and opaque, having evolved over several decades and by now it requires that several hundred parameter values are re-set every day. We present a new, parsimonious parametric model for calculating margin requirements for futures which has a rigorous econometric foundation, being derived entirely from the median tail loss (MTL) of the returns distribution. This facilitates maximum likelihood volatility model calibration and state-of-the-art backtests.
Then the parameters of the margin scheme which overlays the MTL may be calibrated using a variety of objectives. We examine three such objectives, including two which are designed to generate margins which mimic SPAN.

Item Type: Article
Keywords: Finance; Backtesting; Margin Rules; Median Tail Loss; WTI Crude Oil
Schools and Departments: School of Business, Management and Economics > Business and Management
Research Centres and Groups: Quantitative International Finance Network
Depositing User: Andreas Kaeck
Date Deposited: 07 Aug 2018 11:10
Last Modified: 12 Dec 2018 15:53
URI: http://srodev.sussex.ac.uk/id/eprint/77556

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Project NameSussex Project NumberFunderFunder Ref
Optimality Criteria for Commodity Furtures Margin RequirementsG1480GLOBAL RISK INSTITUTECatherine Lubochinsky