School of Economics and Finance

No. 736: The Effects of Margin Changes on Commodity Futures Markets

Charoula Daskalaki , University of Piraeus
George Skiadopoulos , Queen Mary University of London and University of Piraeus

December 15, 2014

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In light of the recently passed 2010 Dodd-Frank Act, we assess the effect of margin changes on prices, the risk-sharing between speculators and hedgers, and the price stability of 20 commodity futures markets. We find that margin increases decrease the rate at which prices change, yet they impair the risk sharing function and they decrease market liquidity in certain markets. The regulator should set margins by taking the heterogeneity of commodity futures markets into account. Certain effects of margin changes diffuse across related markets though. Our results are robust to endogenously set margins by the exchanges.

J.E.L classification codes: G10, G14, G18, G28

Keywords:Commodities, Hedging, Market liquidity, Margins, Speculators