Margin setting with high-frequency data1

TL;DR

This paper investigates whether traditional daily margin setting methods are adequate given high-frequency intraday volatility, analyzing the impact of intraday price dynamics on margin levels using FTSE 100 futures data.

Contribution

It introduces a methodology to incorporate intraday price changes into margin calculations, challenging the reliance on closing prices alone.

Findings

Intraday volatility significantly affects margin levels.

Using intraday data can lead to higher margin requirements.

Traditional methods may underestimate risk during volatile periods.

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.