Setting the Futures Margin with Price Limits: The Case for Single-stock FuturesReview of Quantitative Finance and Accounting (2017)
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.
Publication DateJanuary 1, 2017
Citation InformationChen-Yu Chen, Jian-Hsin Chou, Hung-Gay Fung and Yiuman Tse. "Setting the Futures Margin with Price Limits: The Case for Single-stock Futures" Review of Quantitative Finance and Accounting Vol. 48 Iss. 1 (2017) p. 219 - 237
Available at: http://works.bepress.com/yiuman-tse/4/