Risk aversion and price limits in futures markets

Pin Huang Chou, Mei Chen Lin, Min Teh Yu

Research output: Contribution to journalArticlepeer-review

5 Scopus citations


Assuming that a representative trader is risk-neutral, Brennan [1986. Journal of Financial Economics 16, 213-233] shows that price limits, in conjunction with margins, may help reduce the default risk, lower the margin requirement, and decrease the total contract cost. We show that Brennan's result is true only when the trader's degree of risk aversion is low and the precision of additional information about the equilibrium futures price is also low. When the trader either is more risk-averse or can receive precise information, price limits become ineffective in either reducing the default probability, cutting down the margin requirement, or lowering the contract cost.

Original languageEnglish
Pages (from-to)173-184
Number of pages12
JournalFinance Research Letters
Issue number3
StatePublished - Sep 2005


  • Default risk
  • Futures market
  • Margin requirement
  • Price limits


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