A Method for Price Limits Setting in Futures Market

This paper develops a method for price limits setting in futures market consistent with self-enforcing contract theory that price limits, in conjunction with margin, ought to provide help for futures contract enforcement. We investigate the distribution of return for SHFE natural rubber futures contract and find a characteristic of heavy-tailedness. Thus, we modify the assumption of normal distribution in Brennan’s model of price limits and margin with an empirical distribution estimated by extreme value theory using historical trade data, aiming to introduce the market information of such heavy-tailed price behavior into the setting of price limits. Our results suggest a flexible setting of price limits, in particular, an expansion of price limits when extreme price movement occurs frequently.