Volume 15 | Issue 4 | Article 4

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Margin Setting with POT Model
Chunyang Zhou, Chongfeng Wu, Hailong Liu, and Fubing Liu (G15)

The margin mechanism is one the most important tools for futures exchanges to control their risk exposures and ensure the integrity of the futures markets. In spite of its conceptual simplicity, Value at Risk (VaR) can only measure the loss frequency and disregard the loss size. The expected shortfall is used to remedy the problems of VaR. It is coherent and can measure both the loss frequency and the loss size. In this paper, the POT (Peaks Over Threshold) model is utilized to estimate the Expected Shortfall (ES) and VaR. Using the prices of copper futures contracts traded in LME, empirical comparisons are made between ES, VaR, and current margin level imposed by the clearing house.