The Application Of VaR Method Based On The GARCH Model In Designing Futures Margin

With the market economic development and enter the WTO of our China, domestic enterprises need stronger strength to avoid the risk, need the futures market to play a positive role in finding prices , evading the risk etc.. These changes require the futures market to possess the suitable market scale and market mobility objectively. And this needs to carry on innovating and reforming to the margin system playing an important role in the risk management of the forward market. At present, the level of the margin is set up to confirm according to the value of the contract at present in our country (generally certain proportion of the value of contract). And it is fixing according to the change amount of the price that the margin level of the foreign exchange is set up. We think this method remedy the risk of market price fluctuate in time, but more complicated. And then it is relatively directly simpler to the plant method, but there is not direct relation in the change amount of price. Value at Risk (VaR) is now one of the most popular methods which are used to manage financial risk in the world. VaR method has historical simulation method, Monte Carlo simulation etc. However, in the most methods of VaR calculation, normal distribution of returns is unquestionably chose to serve as the elementary hypothesis. Many empirical studies indicate that the real distribution of the percentage price change is not normal distribution because it has palpable fatter tails and a thinner waist. So the VaR on the basis of normal distribution often leads to underestimation of the real risk. The reason lies in the hypothesis which can not exhibit the tail's character of the real loss. For this reason, this paper tries to introduce VaR method based on GARCH model to overcome this defect of normal distribution. This paper attempts to research and analyzing Shanghai exchange issues of copper and issues of closing price of aluminum to prove that, VaR method based on GARCH model can apply to the futures margin of our country.