Margin Levels and the Behavior of Futures Prices

This paper will demonstrate that different margin levels are associated with the price behavior differences of certain commodity futures. In 1959, Harry Roberts suggested the methodology of rational subgrouping as a means of testing random versus systematic price changes. His methodological suggestion has had only limited testing in security markets and no direct application to domestic futures markets. This paper uses margin levels as a basis for rational subgrouping of selected commodity futures. Evidence supports the argument that, when a series of price changes is grouped according to margin levels and these levels are analyzed separately, nonrandom characteristics that tend to be offsetting in the aggregate series become evident. The nonrandom behavior observed is consistent with the hypothesis that, in certain periods, margin levels have been set too high to attract a volume of speculative services necessary for the maintenance of market balance.