The Existence of Pareto-Superior Price Limits
AbstractThis paper examines the welfare effects of futures price limits under a simple form of market incompleteness. When prices become volatile, shocks to liquidity and fundamentals may occur between the time investors decide to trade and the time their orders are executed. This gives rise to implementation risk that cannot be transferred with contingent claims. The authors show that price limits partially insure implementation risk. When price fluctuations are driven by news about fundamentals, judiciously chosen price limits can be (ex ante) Pareto superior to unconstrained trade. When liquidity shocks are large, price limits benefit hedgers but harm some speculators. Copyright 1994 by American Economic Association.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by American Economic Association in its journal American Economic Review.
Volume (Year): 84 (1994)
Issue (Month): 4 (September)
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Lin, Mei-Chen & Chou, Pin-Huang, 2011. "Prospect theory and the effectiveness of price limits," Pacific-Basin Finance Journal, Elsevier, vol. 19(3), pages 330-349, June.
- Fernandes, Marcelo & Rocha, Marco Aurélio dos Santos, 2006.
"Are price limits on futures markets that cool? Evidence from the Brazilian Mercantile and Futures Exchange,"
Economics Working Papers (Ensaios Economicos da EPGE)
630, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
- Marcelo Fernandes & Marco Aur�lio dos Santos Rocha, 2006. "Are Price Limits on Futures Markets That Cool? Evidence from the Brazilian Mercantile and Futures Exchange," Working Papers 579, Queen Mary, University of London, School of Economics and Finance.
- Goldstein, Michael A. & Kavajecz, Kenneth A., 2004. "Trading strategies during circuit breakers and extreme market movements," Journal of Financial Markets, Elsevier, vol. 7(3), pages 301-333, June.
- Michael A. Goldstein & Kenneth A. Kavajecz, .
"Liquidity Provision during Circuit Breakers and Extreme Market Movements,"
Rodney L. White Center for Financial Research Working Papers
01-00, Wharton School Rodney L. White Center for Financial Research.
- Michael A. Goldstein & Kenneth A. Kavajecz, . "Liquidity Provision during Circuit Breakers and Extreme Market Movements," Rodney L. White Center for Financial Research Working Papers 1-00, Wharton School Rodney L. White Center for Financial Research.
- Joan Evans & James M. Mahoney, 1997. "The effects of price limits on trading volume: a study of the cotton futures market," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 3(Jan).
- Lee, Jie-Haun & Chou, Robin K., 2004. "The intraday stock return characteristics surrounding price limit hits," Journal of Multinational Financial Management, Elsevier, vol. 14(4-5), pages 485-501.
- Kim, Yong H. & Yagüe, José & Yang, J. Jimmy, 2008. "Relative performance of trading halts and price limits: Evidence from the Spanish Stock Exchange," International Review of Economics & Finance, Elsevier, vol. 17(2), pages 197-215.
- Anthony D. Hall & Paul Kofman & R. Guido, 1998. "Limits to Linear Price Behaviour: Target Zones for Futures Prices Regulated By Limits," Research Paper Series 3, Quantitative Finance Research Centre, University of Technology, Sydney.
- Joan Evans & James M. Mahoney, 1996. "The effects of daily price limits on cotton futures and options trading," Research Paper 9627, Federal Reserve Bank of New York.
- Levy, Tamir & Qadan, Mahmod & Yagil, Joseph, 2013. "Predicting the limit-hit frequency in futures contracts," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 141-148.
- Shmuel Hauser & Haim Kedar-Levy & Batia Pilo & Itzhak Shurki, 2006. "The Effect of Trading Halts on the Speed of Price Discovery," Journal of Financial Services Research, Springer, vol. 29(1), pages 83-99, February.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jane Voros) or (Michael P. Albert).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.