Price volatility and futures margins

A study focuses on the relationship between futures margins and futures price volatility. Volatility is an ingredient in an exchange committee's decision to alter the level of margin requirements. The study examines if, indeed, the exchanges respond to higher (lower) volatility by raising (reducing) margins. In addition, the study explores the possibility that the exchanges are not only reacting to past volatility changes but are proactive as well, changing margins in anticipation of further future volatility changes. Eight metal futures contracts are examined: gold (2 contracts), silver (2 contracts), copper, aluminum, platinum, and palladium. Asset returns are modeled as Poisson jump-diffusion processes. The data show that while the exchange raise (lower) margins in an overall environment of increased (reduced) volatility, they do choose to raise (lower) margins in those metals that show the largest increase (decrease).