Minimum capital requirement calculations for UK futures

Abstract

Key to the imposition of appropriate minimum capital requirements on a daily basis requires accurate volatility estimation. Here, measures are presented based on discrete estimation of aggregated high frequency UK futures realisations underpinned by a continuous time framework. Squared and absolute returns are incorporated into the measurement process so as to rely on the quadratic variation of a diffusion process and be robust in the presence of fat tails. The realized volatility estimates incorporate the long memory property. The dynamics of the volatility variable are adequately captured. Resulting rescaled returns are applied to minimum capital requirement calculations.

Volatility and Irish Exports

“…Merton (1980) illustrates the advantages in using relatively high–frequency observations to obtain more precise low‐frequency risk measures, and early applications with monthly estimation cumulating daily observations are given in French, Schwert, and Stambaugh (1987). This paper also analyzes aggregated absolute realizations that evolve from the same theoretical framework, realized power variation (see Barndorff‐Nielsen and Shephard 2003; Cotter 2004), as exchange rate changes have the stylized property of exhibiting fat tails due to excessive large‐scale movements, and modeling with absolute realizations is more robust in the presence of this property (Davidian and Carroll 1987). Also, more attractive time series properties are documented for absolute realized volatility measures than their squared counterparts (Barndorff‐Nielsen and Shephard 2003).…”

Estimating Financial Risk Measures for Futures Positions: A Non-Parametric Approach

“…Given the potential risk associated with futures trading it is not surprising that there is an extensive literature looking at these applications and/or the use of these risk measures for futures including (and by no means exhaustive): Hsieh (1993), Broussard (2001), Longin (2001), Cotter, 2004, Werner and Upper (2004) and Brooks et al (2005.…”

Absolute Return Volatility

“…1 Minimum capital requirements represent reserves that are used to protect financial firms against losses arising from the volatility of their holdings (see Cotter, 2004; for a discussion). 2 A key focus of many studies in market risk measurement is to explore alternative volatility processes.…”