Abstract
Assuming that a representative trader is risk-neutral, Brennan [1986. Journal of Financial Economics 16, 213-233] shows that price limits, in conjunction with margins, may help reduce the default risk, lower the margin requirement, and decrease the total contract cost. We show that Brennan's result is true only when the trader's degree of risk aversion is low and the precision of additional information about the equilibrium futures price is also low. When the trader either is more risk-averse or can receive precise information, price limits become ineffective in either reducing the default probability, cutting down the margin requirement, or lowering the contract cost. © 2005 Elsevier Inc. All rights reserved.