Price Limits and Margin Requirements in Futures Markets
Posted: 30 Nov 2002
This paper investigates the hypothesis that futures exchanges could use daily price limits as a substitute for higher margin requirements. The empirical results show that the size of margin is negatively correlated with the presence of price limits. Evidence points to the portfolio adjustment costs theory as an explanation of the benefits from price limits. The empirical results cast doubt on the notion that price limits should be abolished. The results also confirm that exchanges have set margin requirements according to economic theories.
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