The effectiveness of coordinating price limits across futures and spot markets

Pin Huang Chou, Mei Chen Lin, Min Teh Yu

Research output: Contribution to journalArticlepeer-review

12 Scopus citations


We extend the work of Brennan (1986) to investigate whether the imposition of spot price limits can further reduce the default risk and lower the effective margin requirement for a futures contract that is already under price limits. Our results show that spot price limits do indeed further reduce the default risk and margin requirement effectively. In addition, the more precise the information is that comes from the spot market, the more the spot price limit rule constrains the information available to the losing party. The default probability, contract costs, and margin requirements are then lowered to a greater degree. Furthermore, for a given margin, both spot price limits and futures price limits can partially substitute for each other in ensuring contract performance. The common practice of imposing equal price limits on both the spot and futures markets, though not coinciding with the efficient contract design, has a lower contract cost and margin requirement than that without imposing spot price limits.

Original languageEnglish
Pages (from-to)577-602
Number of pages26
JournalJournal of Futures Markets
Issue number6
StatePublished - 1 Jun 2003


Dive into the research topics of 'The effectiveness of coordinating price limits across futures and spot markets'. Together they form a unique fingerprint.

Cite this