Price limits, margin requirements, and default risk

Pin Huang Chou, Mei Chen Lin, Min Teh Yu

研究成果: 雜誌貢獻期刊論文同行評審

17 引文 斯高帕斯(Scopus)


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.

頁(從 - 到)573-602
期刊Journal of Futures Markets
出版狀態已出版 - 7月 2000


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