Abstract

Traders in futures markets are required to deposit initial margin requirements for their open futures positions and maintain minimum margin requirements for these open positions. Futures exchanges set these margin requirements and require higher margin requirements for more volatile contracts. It has been argued that futures exchanges may use changing margin requirements to control the volatility of futures contracts and this question is still of interest. To address this question, I investigate the relationship between margin changes and futures price volatility for 24 different futures contracts, which include contracts on agricultural commodities, livestock, equity indices, interest rate and foreign currency. I provide evidence using univariate tests that the futures price volatility is significantly reduced following margin increases, while the futures price volatility increases but to a lesser extent following margin decreases. A regression analysis shows that larger margin changes have a greater negative effect on the futures price volatility. This relationship holds for the different futures contracts. Finally, it may be argued that margin requirements and futures price volatility are endogeneous variables. To address the potential presence of endogeneity, I employ the instrumental variables technique along with two stages least squares estimation and find that the inverse relationship between margin changes and volatility still holds.