Adjusting minimal maintenance margin requirement when price limits widening

Authors: Ming-Chang Wang, Lee-Young Cheng, You-Jie Chen

Journal: Chiao Da Management Review. Jun. 2014, 34(1): 1-55.

Keywords: Price Limits; Minimal Maintenance Margin Requirement (MMMR); Value-at-Risk (VaR)

Abstract:
This study aims at to investigate whether the minimal maintenance margin requirement (MMMR) need to adjust considering sufficient safety of the credit trading when the regulators in Taiwan Stock Exchange widen the price limits. Based on different confidence interval, risks, and multiple simulations of portfolios, we estimate Value-at-Risk (VaR) by GARJI model to derive the MMMR threshold according to the upper bound of MMMR.Furthermore, as a key reference of index future in TAlFEX, we establish a credit security degree for standardizing to compare the difference between maintenance margin requirement in spots and future market. Ourempirical results show that the MMMR at 120% could be slight1y insufficient to secure c1aims under wideningto reach 10% price limits. On the other hand, the credit security degree of instantaneous maintenance margin in spots market might approximate to futures market. This study provides the critical economical implicate forpolicy makers to set the optimal MMMR when the price limits widen.