Minimum Capital Requirement Calculations for UK Futures

TL;DR

This paper introduces a new method for estimating volatility of UK futures using high-frequency data and continuous time models, improving minimum capital requirement calculations by capturing long memory and fat tails.

Contribution

It presents a novel volatility estimation approach based on discrete high-frequency data within a continuous time framework, enhancing accuracy for capital requirement calculations.

Findings

Volatility estimates incorporate long memory properties.

Rescaled returns improve minimum capital requirement accuracy.

Method is robust to fat tails in return distributions.

Abstract

Key to the imposition of appropriate minimum capital requirements on a daily basis requires accurate volatility estimation. Here, measures are presented based on discrete estimation of aggregated high frequency UK futures realisations underpinned by a continuous time framework. Squared and absolute returns are incorporated into the measurement process so as to rely on the quadratic variation of a diffusion process and be robust in the presence of fat tails. The realized volatility estimates incorporate the long memory property. The dynamics of the volatility variable are adequately captured. Resulting rescaled returns are applied to minimum capital requirement calculations.