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The effects of daily price limits on cotton futures and options trading


  • Joan Evans
  • James M. Mahoney


The New York Cotton Exchange (NYCE) imposes price limits on the trading of cotton futures, whereby the price at which cotton futures trade during a day is restricted to a band centered around the previous day's close. However, the NYCE has no such restrictions on the trading of options on cotton futures. These exchange rules allow for essentially a controlled experiment to study the market participants' responses to the price limits on futures. We show that, as a higher fraction of the trading day is constrained by the price limit, futures volume significantly decreases, options volume significantly increases, but the average aggregate volume of cotton trade remains unchanged. The empirical analysis indicates that market participants react rationally to the price limit in the futures market by transferring their trading activity to a market without price limits.

Suggested Citation

  • Joan Evans & James M. Mahoney, 1996. "The effects of daily price limits on cotton futures and options trading," Research Paper 9627, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednrp:9627

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    References listed on IDEAS

    1. Brennan, Michael J., 1986. "A theory of price limits in futures markets," Journal of Financial Economics, Elsevier, vol. 16(2), pages 213-233, June.
    2. Richard Cantor, 1989. "Price limits and volatility in soybean meal futures markets," Research Paper 8904, Federal Reserve Bank of New York.
    3. 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 919-932, September.
    4. Don M. Chance, 1994. "Futures pricing and the cost of carry under price limits," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 14(7), pages 813-836, October.
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    Cited by:

    1. Reiffen, David & Buyuksahin, Bahattin, 2010. "The puzzle of privately-imposed price limits: are the limits imposed by financial exchanges effective?," MPRA Paper 35927, University Library of Munich, Germany.
    2. Joan Evans & James M. Mahoney, 1997. "The effects of price limits on trading volume: a study of the cotton futures market," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 3(Jan).
    3. Anthony D. Hall & Paul Kofman & Steve Manaster, 2001. "Migration of Price Discovery With Constrained Futures Markets," Research Paper Series 70, Quantitative Finance Research Centre, University of Technology, Sydney.

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    Prices ; Futures;


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