IDEAS home Printed from https://ideas.repec.org/a/wly/jfutmk/v20y2000i6p573-602.html
   My bibliography  Save this article

Price limits, margin requirements, and default risk

Author

Listed:
  • Pin‐Huang Chou
  • Mei‐Chen Lin
  • Min‐Teh Yu

Abstract

This article investigates whether price limits can reduce the default risk and lower the effective margin requirement for a self‐enforcing futures contract by considering one more period beyond Brennan’s (1986) model to take into account the spillover of unrealized residual shocks due to price limits. The results show that, when traders receive no additional information, price limits can reduce the margin requirement and eliminate the default probability at the expense of a higher liquidity cost due to trading interruptions. Consequently, the total contract cost is higher than of that without price limits. When traders receive additional signals about the equilibrium price, we find that the optimal margin remains unchanged with or without the imposition of price limits, a result that is in conflict with Brennan’s assertion. Hence, we conclude that price limits may not be effective in improving the performance of a futures contract. © 2000 John Wiley & Sons, Inc. Jrl Fut Mark 20:573–602, 2000

Suggested Citation

  • Pin‐Huang Chou & Mei‐Chen Lin & Min‐Teh Yu, 2000. "Price limits, margin requirements, and default risk," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 20(6), pages 573-602, July.
    • Handle: RePEc:wly:jfutmk:v:20:y:2000:i:6:p:573-602
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/
    Download Restriction: no
    ---><---

    Citations

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


    Cited by:

    1. Cheng Xiang & Jing Lu, 2023. "Magnet effects of circuit breakers in electronic order‐driven markets: Evidence from China," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(2), pages 1450-1469, April.
    2. Arie Harel & Giora Harpaz & Joseph Yagil, 2005. "Forecasting futures returns in the presence of price limits," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 25(2), pages 199-210, February.
    3. Aktas, Osman Ulas & Kryzanowski, Lawrence & Zhang, Jie, 2021. "Volatility spillover around price limits in an emerging market," Finance Research Letters, Elsevier, vol. 39(C).
    4. Chen-Yu Chen & Jian-Hsin Chou & Hung-Gay Fung & Yiuman Tse, 2017. "Setting the futures margin with price limits: the case for single-stock futures," Review of Quantitative Finance and Accounting, Springer, vol. 48(1), pages 219-237, January.
    5. Yong H. Kim & J. Jimmy Yang, 2004. "What Makes Circuit Breakers Attractive to Financial Markets? A Survey," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 13(3), pages 109-146, August.
    6. Xiong Xiong & Ding Nan & Yang Yang & Zhang Yongjie, 2015. "Study on Market Stability and Price Limit of Chinese Stock Index Futures Market: An Agent-Based Modeling Perspective," PLOS ONE, Public Library of Science, vol. 10(11), pages 1-12, November.

    More about this item

    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:wly:jfutmk:v:20:y:2000:i:6:p:573-602. 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.

    We have no bibliographic references for this item. You can help adding them by using 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: Wiley Content Delivery (email available below). General contact details of provider: http://www.interscience.wiley.com/jpages/0270-7314/ .

    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.