What is a good margin level for NGDP futures?

Minimum margins for futures contracts are set by the clearinghouse for the exchange. They will typically set these margins at a 99% confidence interval for  a one day move.

What this means is the dollar value of the margin is set so it covers 99% of the one day movement in the contract. Because futures accounts must be funded every night, this covers all but the worst case scenarios single day moves.

How much can we expect NGDP futures to move on any single day? Well, I am not entirely sure the contracts move at all, because the proponents of the contracts seem to have shifting views. But assuming these contracts do move, what can we expect in a single day movement?

We do not have daily GDP data. We get GDP data quarterly. However, through some math, we can transform any periodic volatility into another period volatility by multiplying or dividing by the square root of time. We can figure out what the quarterly volatility is for GDP, and then translate this into an expected daily volatility of GDP.

For this investigation, I am using the great moderation as the benchmark. We get a standard deviation of 2% using quarterly data from the years 1984 through 2007. This translates into a daily standard deviation of 0.25%. Expect GDP to move 0.25% per day around the average.

The 99% confidence interval used by most exchanges will give us a 2.5 t multiplier for this standard deviation. So the margin for a NGDP futures contract would be set at 0.25% * 2.5 = 0.625%.

NGDP (per capita) level target proponents typically claim once the fed begins to target NGDP levels, NGDP will be even less volatile. So this 0.62% margin is probably a bit higher than what we would see under an NGDP level target regime.

Most professional market participants are constantly complaining about margins being set too high. The margins for futures contracts are set much higher than margins for similar over the counter transactions. The fed would have to somehow have to push the effective margin rate to something far lower than 0.625% to get professionals to participate.

Scott Sumner has said the margin levels for NGDP futures would be set at 10% and the fed would pay interest on these margins at a high enough level to incentivize people to participate. The first hurdle the fed would need to overcome is to simply get the effective margin rates down to a level market participants feel is fair.








Expert in business development, product development, and direct marketing. Developed strategic sales plans, product innovations, and business plans for multiple companies. Conceived the patent pending Spot Equivalent Futures (SEF) mechanism, which allows true replication of spot and swap like products in the futures space.

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