IDEAS home Printed from https://ideas.repec.org/a/eee/jbfina/v37y2013i11p4501-4509.html
   My bibliography  Save this article

The effectiveness of position limits: Evidence from the foreign exchange futures markets

Author

Listed:
  • Chang, Ya-Kai
  • Chen, Yu-Lun
  • Chou, Robin K.
  • Gau, Yin-Feng

Abstract

This study considers the effects of the relative size of hedger and speculator open interests and the potential impact of implementing position limits on the price discovery process in both JPY–USD and EUR–USD futures markets. Hedging trading exerts a negative impact, regardless of its size, on price discovery in futures markets. Hedgers are less likely to be information motivated, so their trading uniformly delays the price discovery process. However, there is a positive and nonlinear impact of speculators’ trade size on price discovery, the contribution of which depends on the relative size of the speculative open interest. Contrary to conventional wisdom among regulators, speculative trading does not harm the market in terms of market efficiency; as long as the percentage of speculators’ open interest is below an endogenously determined threshold (approximately 20% for EUR–USD and 16.3% for JPY–USD), speculative trading even improves futures market efficiency.

Suggested Citation

  • Chang, Ya-Kai & Chen, Yu-Lun & Chou, Robin K. & Gau, Yin-Feng, 2013. "The effectiveness of position limits: Evidence from the foreign exchange futures markets," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4501-4509.
    • Handle: RePEc:eee:jbfina:v:37:y:2013:i:11:p:4501-4509
    DOI: 10.1016/j.jbankfin.2013.02.033
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0378426613001301
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jbankfin.2013.02.033?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Dick van Dijk & Timo Terasvirta & Philip Hans Franses, 2002. "Smooth Transition Autoregressive Models — A Survey Of Recent Developments," Econometric Reviews, Taylor & Francis Journals, vol. 21(1), pages 1-47.
    2. Changyun Wang, 2003. "The behavior and performance of major types of futures traders," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 23(1), pages 1-31, January.
    3. Sanders, Dwight R. & Boris, Keith & Manfredo, Mark, 2004. "Hedgers, funds, and small speculators in the energy futures markets: an analysis of the CFTC's Commitments of Traders reports," Energy Economics, Elsevier, vol. 26(3), pages 425-445, May.
    4. Kumar, Praveen & Seppi, Duane J, 1992. "Futures Manipulation with "Cash Settlement."," Journal of Finance, American Finance Association, vol. 47(4), pages 1485-1502, September.
    5. Wang, Changyun, 2004. "Futures trading activity and predictable foreign exchange market movements," Journal of Banking & Finance, Elsevier, vol. 28(5), pages 1023-1041, May.
    6. Gonzalo, Jesus & Granger, Clive W J, 1995. "Estimation of Common Long-Memory Components in Cointegrated Systems," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(1), pages 27-35, January.
    7. de Jong, Frank, 2002. "Measures of contributions to price discovery: a comparison," Journal of Financial Markets, Elsevier, vol. 5(3), pages 323-327, July.
    8. Andreas Röthig & Carl Chiarella, 2007. "Investigating nonlinear speculation in cattle, corn, and hog futures markets using logistic smooth transition regression models," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 27(8), pages 719-737, August.
    9. Martens, Martin & Kofman, Paul, 1998. "The inefficiency of Reuters foreign exchange quotes," Journal of Banking & Finance, Elsevier, vol. 22(3), pages 347-366, March.
    10. Bhargava, Vivek & Malhotra, D.K., 2007. "The relationship between futures trading activity and exchange rate volatility, revisited," Journal of Multinational Financial Management, Elsevier, vol. 17(2), pages 95-111, April.
    11. Changyun Wang, 2003. "Investor sentiment, market timing, and futures returns," Applied Financial Economics, Taylor & Francis Journals, vol. 13(12), pages 891-898.
    12. repec:bla:jfinan:v:59:y:2004:i:3:p:1235-1258 is not listed on IDEAS
    13. Lütkepohl,Helmut & Krätzig,Markus (ed.), 2004. "Applied Time Series Econometrics," Cambridge Books, Cambridge University Press, number 9780521547871, January.
    14. Strikholm, Birgit & Teräsvirta, Timo, 2005. "Determining the Number of Regimes in a Threshold Autoregressive Model Using Smooth Transition Autoregressions," SSE/EFI Working Paper Series in Economics and Finance 578, Stockholm School of Economics, revised 11 Feb 2005.
    15. deB. Harris, Frederick H. & McInish, Thomas H. & Wood, Robert A., 2002. "Security price adjustment across exchanges: an investigation of common factor components for Dow stocks," Journal of Financial Markets, Elsevier, vol. 5(3), pages 277-308, July.
    16. Glosten, Lawrence R & Jagannathan, Ravi & Runkle, David E, 1993. "On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks," Journal of Finance, American Finance Association, vol. 48(5), pages 1779-1801, December.
    17. Louis Ederington & Jae Ha Lee, 2002. "Who Trades Futures and How: Evidence from the Heating Oil Futures Market," The Journal of Business, University of Chicago Press, vol. 75(2), pages 353-374, April.
    18. Hasbrouck, Joel, 1995. "One Security, Many Markets: Determining the Contributions to Price Discovery," Journal of Finance, American Finance Association, vol. 50(4), pages 1175-1199, September.
    19. Changyun Wang, 2002. "Information, Trading Demand, and Futures Price Volatility," The Financial Review, Eastern Finance Association, vol. 37(2), pages 295-315, May.
    20. Andreas Röthig & Carl Chiarella, 2011. "Small traders in currency futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 31(9), pages 898-914, September.
    21. Mizrach, Bruce & Neely, Christopher J., 2008. "Information shares in the US Treasury market," Journal of Banking & Finance, Elsevier, vol. 32(7), pages 1221-1233, July.
    22. Hasbrouck, Joel, 2002. "Stalking the "efficient price" in market microstructure specifications: an overview," Journal of Financial Markets, Elsevier, vol. 5(3), pages 329-339, July.
    23. Nicholas Kaldor, 1939. "Speculation and Economic Stability," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 7(1), pages 1-27.
    24. Baillie, Richard T. & Geoffrey Booth, G. & Tse, Yiuman & Zabotina, Tatyana, 2002. "Price discovery and common factor models," Journal of Financial Markets, Elsevier, vol. 5(3), pages 309-321, July.
    25. Lütkepohl,Helmut & Krätzig,Markus (ed.), 2004. "Applied Time Series Econometrics," Cambridge Books, Cambridge University Press, number 9780521839198, January.
    26. Harris, Frederick H. deB. & McInish, Thomas H. & Wood, Robert A., 2002. "Common factor components versus information shares: a reply," Journal of Financial Markets, Elsevier, vol. 5(3), pages 341-348, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Chen, Yu-Lun & Yang, J. Jimmy, 2021. "Trader positions in VIX futures," Journal of Empirical Finance, Elsevier, vol. 61(C), pages 1-17.
    2. Yu-Lun Chen, 2020. "News announcements and price discovery in the RMB–USD market," Review of Quantitative Finance and Accounting, Springer, vol. 54(4), pages 1487-1508, May.
    3. Zhang, Xiaotao & Zhao, Yuepeng & Wang, Ziqiao, 2024. "Do loosened trading rules restore the stock index futures price discovery ability in China?," International Review of Economics & Finance, Elsevier, vol. 93(PB), pages 389-397.
    4. Switzer, Lorne N. & Tu, Qiao, 2024. "The impact of position limits on options trading," Finance Research Letters, Elsevier, vol. 61(C).
    5. Chiu-Lan Chang & Ming Fang, 2015. "An Analysis on Trading Behaviors of Currency Futures: Evidence from BRICS Countries," Accounting and Finance Research, Sciedu Press, vol. 4(2), pages 134-134, May.
    6. Hung, Jui-Cheng & Liu, Hung-Chun & Yang, J. Jimmy, 2021. "Trading activity and price discovery in Bitcoin futures markets," Journal of Empirical Finance, Elsevier, vol. 62(C), pages 107-120.
    7. Narayan, Seema & Smyth, Russell, 2015. "The financial econometrics of price discovery and predictability," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 380-393.
    8. Fang, Ming & Chang, Chiu-Lan & Zhang, Qi, 2023. "Impacts of trading restrictions on price volatilities and speculative activities: Evidence from CSI 300 futures," Economic Analysis and Policy, Elsevier, vol. 79(C), pages 184-204.
    9. Chen, Yu-Lun & Chang, Ya-Kai, 2015. "Investor structure and the informational efficiency of commodity futures prices," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 358-367.
    10. Apergis, Nicholas & Mustafa, Ghulam & Malik, Shafaq, 2023. "The role of the COVID-19 pandemic in US market volatility: Evidence from the VIX index," The Quarterly Review of Economics and Finance, Elsevier, vol. 89(C), pages 27-35.
    11. Chen, Yu-Lun & Tsai, Wei-Che, 2017. "Determinants of price discovery in the VIX futures market," Journal of Empirical Finance, Elsevier, vol. 43(C), pages 59-73.
    12. Piccotti, Louis R. & Schreiber, Ben Z., 2020. "Information shares in a two-tier FX market," Journal of Empirical Finance, Elsevier, vol. 58(C), pages 19-35.
    13. Edward Curran & Jack Hunt & Vito Mollica, 2020. "Trading protocols and price discovery: Implicit transaction costs in Indian single stock futures," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(11), pages 1793-1806, November.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Yu-Lun Chen & Yin-Feng Gau & Wen-Ju Liao, 2016. "Trading activities and price discovery in foreign currency futures markets," Review of Quantitative Finance and Accounting, Springer, vol. 46(4), pages 793-818, May.
    2. Christoph Schmidhammer & Sebastian Lobe & Klaus Röder, 2016. "The day the index rose 11 %: a clinical study on price discovery reversal," Review of Quantitative Finance and Accounting, Springer, vol. 46(1), pages 79-106, January.
    3. Chen, Wei-Peng & Chung, Huimin & Lien, Donald, 2016. "Price discovery in the S&P 500 index derivatives markets," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 438-452.
    4. Li, Wei-Xuan & Chen, Clara Chia-Sheng & Nguyen, James, 2022. "Which market dominates the price discovery in currency futures? The case of the Chicago Mercantile Exchange and the Intercontinental Exchange," Global Finance Journal, Elsevier, vol. 52(C).
    5. Fricke, Christoph & Menkhoff, Lukas, 2011. "Does the "Bund" dominate price discovery in Euro bond futures? Examining information shares," Journal of Banking & Finance, Elsevier, vol. 35(5), pages 1057-1072, May.
    6. Donald Lien & Zijun Wang, 2016. "Estimation of Market Information Shares: A Comparison," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 36(11), pages 1108-1124, November.
    7. Wu, Zhen-Xing & Gau, Yin-Feng & Chen, Yu-Lun, 2023. "Price discovery and triangular arbitrage in currency markets," Journal of International Money and Finance, Elsevier, vol. 137(C).
    8. Karsten Schweikert, 2021. "Bootstrap Confidence Intervals and Hypothesis Testing for Market Information Shares [Price Discovery and Common Factor Models]," Journal of Financial Econometrics, Oxford University Press, vol. 19(5), pages 934-959.
    9. Chen, Yu-Lun & Gau, Yin-Feng, 2010. "News announcements and price discovery in foreign exchange spot and futures markets," Journal of Banking & Finance, Elsevier, vol. 34(7), pages 1628-1636, July.
    10. Chen, Yu-Lun & Gau, Yin-Feng, 2014. "Asymmetric responses of ask and bid quotes to information in the foreign exchange market," Journal of Banking & Finance, Elsevier, vol. 38(C), pages 194-204.
    11. Zema, Sebastiano Michele, 2022. "Directed acyclic graph based information shares for price discovery," Journal of Economic Dynamics and Control, Elsevier, vol. 139(C).
    12. Christoph Schmidhammer & Sebastian Lobe & Klaus Röder, 2016. "The day the index rose 11 %: a clinical study on price discovery reversal," Review of Quantitative Finance and Accounting, Springer, vol. 46(1), pages 79-106, January.
    13. Corbet, Shaen & Hou, Yang & Hu, Yang & Oxley, Les, 2020. "The influence of the COVID-19 pandemic on asset-price discovery: Testing the case of Chinese informational asymmetry," International Review of Financial Analysis, Elsevier, vol. 72(C).
    14. Sigl-Grüb, C. & Schiereck, D., 2010. "Speculation and Nonlinear Price Dynamics in Commodity Futures Markets," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 56603, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    15. Hou, Yang & Li, Steven, 2017. "Time-Varying Price Discovery and Autoregressive Loading Factors: Evidence from S&P 500 Cash and E-Mini Futures Markets," MPRA Paper 81999, University Library of Munich, Germany.
    16. Mizrach, Bruce & Neely, Christopher J., 2008. "Information shares in the US Treasury market," Journal of Banking & Finance, Elsevier, vol. 32(7), pages 1221-1233, July.
    17. Bongjin Kim & Mark M. Suazo & John E. Prescott, 2008. "Exploring the Cognitive Nature of Boards of Directors and Its Implication for Board Effectiveness," Working Papers 0032, College of Business, University of Texas at San Antonio.
    18. Chen, Yu-Lun & Gau, Yin-Feng, 2015. "Foreign exchange market intervention and price discovery," Journal of the Japanese and International Economies, Elsevier, vol. 38(C), pages 214-227.
    19. Yan, Bingcheng & Zivot, Eric, 2010. "A structural analysis of price discovery measures," Journal of Financial Markets, Elsevier, vol. 13(1), pages 1-19, February.
    20. Grammig, Joachim & Melvin, Michael & Schlag, Christian, 2005. "Internationally cross-listed stock prices during overlapping trading hours: price discovery and exchange rate effects," Journal of Empirical Finance, Elsevier, vol. 12(1), pages 139-164, January.

    More about this item

    Keywords

    Hedging; Information shares; Price discovery; Position limits; Speculation;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jbfina:v:37:y:2013:i:11:p:4501-4509. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jbf .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.