The Effects of Price Limits on Trading Volume: A Study of the Cotton Futures Market

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The Effects of Price Limits on Trading Volume: A Study of the Cotton Futures Market

January 1997 Volume 3 Number 2

JEL classification: G13, G14, G18

Authors: Joan Evans and James M. Mahoney

Will trading volume shift from a market with price limits to a closely related market without them? An examination of the U.S. cotton market reveals that trading volume does in fact move from a class of security that is subject to trading limits (cotton futures) to another that is not (options on cotton futures). The results add to the debate on trading limits by calling into question the limits' overall effectiveness.

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6 pages / 93 kb

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