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

Ya Kai Chang, Yu Lun Chen, Robin K. Chou, Yin Feng Gau

Research output: Contribution to journalArticlepeer-review

9 Scopus citations


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.

Original languageEnglish
Pages (from-to)4501-4509
Number of pages9
JournalJournal of Banking and Finance
Issue number11
StatePublished - Nov 2013


  • Hedging
  • Information shares
  • Position limits
  • Price discovery
  • Speculation


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