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Are Price Limits on Futures Markets That Cool? Evidence from the Brazilian Mercantile and Futures Exchange

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Author Info
Marcelo Fernandes () (Queen Mary, University of London)
Marco Aurélio dos Santos Rocha () (University of Illinois at Urbana-Champaign)

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Abstract

This paper investigates the impact of price limits on the Brazilian futures markets using high frequency data. The aim is to identify whether there is a cool-off or a magnet effect. For that purpose, we examine a tick-by-tick data set that includes all contracts on the São Paulo stock index futures traded on the Brazilian Mercantile and Futures Exchange from January 1997 to December 1999. The results indicate that the conditional mean features a floor cool-off effect, whereas the conditional variance significantly increases as the price approaches the upper limit. We then build a trading strategy that accounts for the cool-off effect in the conditional mean so as to demonstrate that the latter has not only statistical, but also economic significance. The in-sample Sharpe ratio indeed is way superior to the buy-and-hold benchmarks we consider, whereas out-of-sample results evince similar performances.

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Paper provided by Queen Mary, University of London, Department of Economics in its series Working Papers with number 579.

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Date of creation: Nov 2006
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Handle: RePEc:qmw:qmwecw:wp579

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Related research
Keywords: Cool-off effect Futures markets Magnet effect Price limits Transactions data

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Find related papers by JEL classification:
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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