Price Limits And Margin Requirements In Futures Markets PDF Download

Margin requirements for futures contracts represent the amount that traders have to deposit to protect the broker from default. Margin requirements may be used as a tool to prevent excessive volatility in the futures price by limiting excessive speculation in the futures market. Previous studies that examined the effectiveness of margin requirements upon price volatility have not found evidence that margins are able to stabilize the futures price volatility. However, none of these studies have considered the price limits specified by the futures exchange to reduce large movements in prices. Thus, the objective of this study is to examine two Canadian agriculture futures contracts--the canola and the western domestic barley futures contract which are traded on the ICE Futures Canada--over the period June 2002 through June 2009, to understand whether increases in margins are effective at stabilizing futures prices after considering the effect of price limits upon futures prices. The results show that increases in margins can reduce futures price volatility when price limits are taken into consideration for the canola contract, but not for the barley contract. Moreover, the existence of price limits appears to have a gravitation (destabilization) effect on canola futures price volatility but no effect on the barley futures price volatility.