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Limits to linear price behavior: futures prices regulated by limits

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  • Robert I. Webb
  • Anthony D. Hall
  • Paul Kofman

Abstract

This article analyzes the behavior of futures prices when the exchange is regulated by price limits. With a model analogous to exchange‐rate target‐zone models, we tested for the existence of a nonlinear S‐shape relation between observed and theoretical futures prices. This phenomenon reflects the adjustments in traders’ expectations even when limits are not actually hit. The approach is illustrated for five agricultural futures contracts traded at the Chicago Board of Trade. There is some evidence of nonlinearity in quiet periods. In cases of fundamental realignments, that is, volatile periods, this nonlinearity disappears. © 2001 John Wiley & Sons, Inc. Jrl Fut Mark 21:463–488, 2001

Suggested Citation

  • Robert I. Webb & Anthony D. Hall & Paul Kofman, 2001. "Limits to linear price behavior: futures prices regulated by limits," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 21(5), pages 463-488, May.
    • Handle: RePEc:wly:jfutmk:v:21:y:2001:i:5:p:463-488
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    Cited by:

    1. K. Smimou, 2013. "On the significance testing of fuzzy regression applied to the CAPM: Canadian commodity futures evidence," International Journal of Applied Management Science, Inderscience Enterprises Ltd, vol. 5(2), pages 144-171.
    2. Arie Harel & Giora Harpaz & Joseph Yagil, 2005. "Forecasting futures returns in the presence of price limits," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 25(2), pages 199-210, February.
    3. Alexander Eastman & Brian Lucey, 2008. "Skewness and asymmetry in futures returns and volumes," Applied Financial Economics, Taylor & Francis Journals, vol. 18(10), pages 777-800.
    4. Daphne Yan Du & Qianqiu Liu & S. Ghon Rhee, 2009. "An Analysis of the Magnet Effect under Price Limits," International Review of Finance, International Review of Finance Ltd., vol. 9(1‐2), pages 83-110, March.
    5. Imtiaz Mohammad Sifat & Azhar Mohamad, 2019. "Circuit breakers as market stability levers: A survey of research, praxis, and challenges," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 24(3), pages 1130-1169, July.
    6. Zhihong Jian & Zhican Zhu & Jie Zhou & Shuai Wu, 2018. "The Magnet Effect of Circuit Breakers: A role of price jumps and market liquidity," Departmental Working Papers 2018-01, The University of Winnipeg, Department of Economics.
    7. Sifat, Imtiaz Mohammad & Mohamad, Azhar, 2018. "Trading aggression when price limit hits are imminent: NARDL based intraday investigation of magnet effect," Journal of Behavioral and Experimental Finance, Elsevier, vol. 20(C), pages 1-8.
    8. Hall, Anthony D & Kofman, Paul, 2001. "Regulatory Tools and Price Changes in Futures Markets," Australian Economic Papers, Wiley Blackwell, vol. 40(4), pages 520-540, December.
    9. Sifat, Imtiaz Mohammad & Mohamad, Azhar, 2020. "A survey on the magnet effect of circuit breakers in financial markets," International Review of Economics & Finance, Elsevier, vol. 69(C), pages 138-151.
    10. Jian, Zhihong & Zhu, Zhican & Zhou, Jie & Wu, Shuai, 2020. "Intraday price jumps, market liquidity, and the magnet effect of circuit breakers," International Review of Economics & Finance, Elsevier, vol. 70(C), pages 168-186.
    11. Tamir Levy & Joseph Yagil, 2006. "An Empirical Comparison of Price‐Limit Models," International Review of Finance, International Review of Finance Ltd., vol. 6(3‐4), pages 157-176, September.
    12. Wang, Yuanfang & Roberts, Matthew C., 2005. "Realized Volatility in the Agricultural Futures Market," 2005 Annual meeting, July 24-27, Providence, RI 19211, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

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