Study On Setting Up Margins Of Futures Market In China Based On Extreme Value Theory

Extreme value theory, as a model technology for predicting the riskof abnormal events or small probability events, is used to set up theoptimal margin of futures in recent years, however, research has focusedmore on the use of extreme value theory to set up the margins against thetraditional price risk but is lack of consideration of liquidity risk which isone part of risk and could not be neglected in the futures market in China.So this paper brings up a new method to measure risks after adjustment ofliquidity risk, and constructs optimization model of setting up margins offutures market in China. Meanwhile, the paper uses Hill method andGARCH-VaR-x model to estimate conditional and unconditional marginlevels and empirically studies the optimal margin levels of commodityfutures in China by taking the liquidity risk into consideration.The major empirical results include:(1) we will underestimate theoverall risk if we neglect the liquidity risk of futures market, especiallyfor those kinds of futures with poor liquidity. (2) The optimizationmargins after adjustment of liquidity risk can well cover the price risk andliquidity risk of the futures market. (3) From the perspective of thefutures brokers of our country, the margin levels of our country set bythem are high enough to cover the price risk and liquidity risk, which isnot like the results that the current level of margin of futures market is toohigh that are showed in some papers.