Limits to Linear Price Behaviour: Target Zones for Futures Prices Regulated By Limits
AbstractThis 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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Bibliographic InfoPaper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 3.
Date of creation: 01 Dec 1998
Date of revision:
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; Switching Regression Models
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
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