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Limits to Linear Price Behaviour: Target Zones for Futures Prices Regulated By Limits

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Author Info
Anthony D. Hall () (School of Finance and Economics, University of Technology, Sydney)
Paul Kofman (Department of Finance, University of Melbourne)
R. Guido

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Abstract

This paper analyzes the random walk behaviour of futures prices when the exchange regulated by price limits. Using a model analogous to exchange rate target zone models, the study tests for the existence of a nonlinear S-shape relation between observed and theoretical futures prices. This phenomenon reflects the adjustment 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 non-liearity disappears.

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File URL: http://www.business.uts.edu.au/qfrc/research/research_papers/rp3.pdf
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Publisher Info
Paper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 3.

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Date of creation: 01 Dec 1998
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Handle: RePEc:uts:rpaper:3

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Related research
Keywords: price limits; target zones; gravitation; mean reversion;

Find related papers by JEL classification:
C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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  1. Harris, Lawrence, 1990. "Estimation of Stock Price Variances and Serial Covariances from Discrete Observations," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 25(03), pages 291-306, September. [Downloadable!]
  2. Kodres, Laura E & O'Brien, Daniel P, 1994. "The Existence of Pareto-Superior Price Limits," American Economic Review, American Economic Association, vol. 84(4), pages 919-32, September. [Downloadable!] (restricted)
  3. Krugman, Paul R, 1991. "Target Zones and Exchange Rate Dynamics," The Quarterly Journal of Economics, MIT Press, vol. 106(3), pages 669-82, August. [Downloadable!] (restricted)
    Other versions:
  4. Subrahmanyam, Avanidhar, 1994. " Circuit Breakers and Market Volatility: A Theoretical Perspective," Journal of Finance, American Finance Association, vol. 49(1), pages 237-54, March. [Downloadable!] (restricted)
  5. Hashem Pesaran, M. & Ruge-Murcia, Francisco J., 1996. "Limited-dependent rational expectations models with stochastic thresholds," Economics Letters, Elsevier, vol. 51(3), pages 267-276, June. [Downloadable!] (restricted)
    Other versions:
  6. Ma, C.K. & Rao, R.P. & Sears, R.S., 1988. "Limit Moves And Price Resolution: The Case Of The Treasury Bond Futures Markets," Papers 177, Columbia - Center for Futures Markets.
  7. Rose, Colin, 1995. "A statistical identity linking folded and censored distributions," Journal of Economic Dynamics and Control, Elsevier, vol. 19(8), pages 1391-1403, November. [Downloadable!] (restricted)
  8. Roll, Richard, 1984. "Orange Juice and Weather," American Economic Review, American Economic Association, vol. 74(5), pages 861-80, December. [Downloadable!] (restricted)
  9. Pesaran, M Hashem & Samiei, Hossein, 1992. "An Analysis of the Determination of Deutsche Mark/French Franc Exchange Rate in a Discrete-Time Target-Zone Model," Economic Journal, Royal Economic Society, vol. 102(411), pages 388-401, March. [Downloadable!] (restricted)
    Other versions:
  10. Kees G. Koedijk & Philip A. Stork & Casper G. De Vries, 1998. "An EMS target zone model in discrete time," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 13(1), pages 31-48. [Downloadable!]
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