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Limit Moves as Censored Observations of Equilibrium Futures Price in GARCH Processes

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  • Morgan, I G
  • Trevor, R G

Abstract

We develop an algorithm for estimating generalized autoregressive conditional heteroscedasticity models for time series containing some censored observations. Motivation for the algorithm comes from those futures markets and some equity markets that have limits constraining the maximum allowable movement in price in a day. When a limit is reached, trading stops and the equilibrium price is not observed. We maximize the likelihood function by replacing the unobservable squared error terms with their expected values. We evaluate the algorithm performance by extensive simulation and apply it to treasury-bill futures data from a period of high volatility and frequent limit moves.

Suggested Citation

  • Morgan, I G & Trevor, R G, 1999. "Limit Moves as Censored Observations of Equilibrium Futures Price in GARCH Processes," Journal of Business & Economic Statistics, American Statistical Association, vol. 17(4), pages 397-408, October.
  • Handle: RePEc:bes:jnlbes:v:17:y:1999:i:4:p:397-408
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    Cited by:

    1. Friedmann, Ralph & Sanddorf-Kohle, Walter G., 2007. "A conditional distribution model for limited stock index returns," Journal of Economic Dynamics and Control, Elsevier, vol. 31(3), pages 721-741, March.
    2. Tim Bollerslev, 2008. "Glossary to ARCH (GARCH)," CREATES Research Papers 2008-49, Department of Economics and Business Economics, Aarhus University.
    3. Broto, Carmen & Ruiz, Esther, 2006. "Unobserved component models with asymmetric conditional variances," Computational Statistics & Data Analysis, Elsevier, vol. 50(9), pages 2146-2166, May.
    4. Jean-Paul Chavas & Kwansoo Kim, 2006. "An econometric analysis of the effects of market liberalization on price dynamics and price volatility," Empirical Economics, Springer, vol. 31(1), pages 65-82, March.
    5. Gong-meng Chen & Oliver Rui & Steven Wang, 2005. "The Effectiveness of Price Limits and Stock Characteristics: Evidence from the Shanghai and Shenzhen Stock Exchanges," Review of Quantitative Finance and Accounting, Springer, vol. 25(2), pages 159-182, September.
    6. Chavas, Jean-Paul & Kim, Kwansoo, 2005. "An Econometric Analysis of Price Dynamics in the Presence of a Price Floor: The Case of American Cheese," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 37(1), pages 21-35, April.
    7. Gabriele Fiorentini & Enrique Sentana & Neil Shephard, 2004. "Likelihood-Based Estimation of Latent Generalized ARCH Structures," Econometrica, Econometric Society, vol. 72(5), pages 1481-1517, 09.

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