Title

The role of margin requirements in futures markets: Reducing trader default and market price volatility

Date of Award

1993

Availability

Article

Degree Name

Doctor of Philosophy (Ph.D.)

Department

Economics

First Committee Member

Raymond P. H. Fishe, Committee Chair

Abstract

Performance margins in futures markets have been modeled as part of the liquidity cost of trading in futures markets. This study develops a theoretical model from the futures exchange's perspective. Margins reduce the exchange's costs of guaranteeing performance by reducing the trader's benefits from having the option to renege on the contract. The trader's optimization process is a part of the exchange's profit maximization process. The solutions to the problem are non linear and the response of profit and demand functions to changes in margins or transaction fees are of an indeterminant sign from a theoretical (a-priori) perspective.Solutions to the model are simulated for two contracts on the Chicago Board of Trade. The data come from the Wall Street Journal and conversations with people in the futures industry. Simulation results demonstrate that for certain parametric scenarios the response of demand to changes in margin levels is indeed not monotonic.The issue of using margins as a tool to reduce futures price volatility is controversial. This study conducts regression analysis, using an event study methodology, to examine the short and longer term impact of changes in margin levels on price volatility for ten contracts traded on the Chicago Board of trade from 1972-1978. The data come from the Chicago Board of Trade. The results demonstrate that any impact of higher margins for dampening price volatility vanishes in about a month or so.

Keywords

Economics, Commerce-Business; Economics, Finance; Economics, Theory

Link to Full Text

http://access.library.miami.edu/login?url=http://gateway.proquest.com/openurl?url_ver=Z39.88-2004&rft_val_fmt=info:ofi/fmt:kev:mtx:dissertation&res_dat=xri:pqdiss&rft_dat=xri:pqdiss:9331505