《Margining Paper-SSRN》.pdf

SPAN Margining of Option Trading: How Accuracy Promotes Efficiency Rafi Eldor, Shmuel Hauser, and Uzi Yaari ♦ April 2008 Corresponding Author: Shmuel Hauser School of Management Ben Gurion University Beer Sheva 84105 Israel e-mail: shauser@bgumail.bgu.ac.il ♦ Rafi Eldor is from the Interdisciplinary Center, Hertzlia, Israel; Shmuel Hauser is from Ben Gurion University and Ono Acdemic College, Israel; and Uzi Yaari is from Rutgers University at Camden, NJ, USA. The authors thank Yakov Amihud, Eric Berger, Menachem Brenner, Avi Kamara, Roni Michaeli, and Oded Sarig for their helpful comments, and Avi Suliman and Leon Sandler for their assistance in processing the data. SPAN Margining of Option Trading: How Accuracy Promotes Efficiency Abstract Margin requirements are designed to control the default risk inherent to commitments undertaken by option traders. Much like similar institutions, the Tel Aviv Stock Exchange (TASE) first adopted a system based on the Standard Portfolio Analysis of Risk (SPAN), which sets required levels of options margin according to the most pessimistic of 16 possible outcomes. Seeking to lower the probability of default without adversely affecting liquidity, the TASE switched in 2001 to a more detailed margin system based on the most pessimistic of 44 scenarios. This change provides us with an ideal laboratory for testing the impact of increased margining precision on the efficiency of option trading. Based on a sample of over 3 million transactions, we conclude that the more accurate pricing of default risk over the studied range