Analysis Of The Relationship Between Margin, Trade Volume And Price Volatility Of Futures

The margin system is the central part of the risk control system for every derivatives market. About the margin system, there are two theory to explain the use of the margin system. The first is to control or avoid the default risk, the second is to change the trading activity in order to control the market risk. Raise margin can add to the trading cost of the investors. In this way, the exchanges and the regulators can reduce the speculation degree. For example, the rise of the margin may result in the reduce of the trading volume, open interest and volatility.Although there have been some studies about the relationship between margin level, trading volume and price volatility, there are still arguments about the relationship. This paper focused on relationship between margin changes and trading volume in China’s copper commodity futures market between 2003 and 2012 to explore how current margin system affect trading activities and manage market risk. It utilizes event study methodology, structural vector auto-regression model to examine the effect of various types of margin changes on different contracts. In the paper, we divide the changes of margin level into three occasions. The first is change with the time, the second is change with emergencies or risk, the third is the basic level change. Besides, we use SVAR model to avoid endogenous relationship between these three variations.Innovation of this paper:First, we divide the margin adjustments into routine adjustments, risk-based margin adjustment and basic adjustment three cases, we study margin adjustments’effects under different circumstances; Second, the use of structural vector auto-regression model in order to eliminate the inter-relationship among margin, trading volume and price volatility; Third, we use the main contract and the contract before the delivery month to test SVAR model.Studies have shown that margin level was negatively correlated with trading volume. Risk based adjustment does not reflect on trading volume and price volatility. Basic margin level increased, while trading volume and price volatility didn’t change obviously, but when the margin level decreased, the trading volume increased obviously. SVAR research methods also showed that.The conclusion:First, routine adjustment of margin level significantly negative correlation; Second, risk-based margin adjustment had no significant effect on the trading volume and price volatility, its role is mainly reflected in the prevention of breach of contract; Third base margin adjustment will not have a significant impact on price volatility, but reduces the margin can promote the trading volume.First, given the lower margin will not enlarge the basis of price fluctuations, it can reduce the margin levels to improve market liquidity; Second, margin adjustments do not reflect the current market volatility risk, we suggest to use a dynamic adjustment system; Third, change the way of calculating margin to make it more effective in changing the behavior of the investors.