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

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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.

Suggested Citation

  • Anthony D. Hall & Paul Kofman & Ron Guido, 1998. "Limits to Linear Price Behaviour: Target Zones for Futures Prices Regulated By Limits," Research Paper Series 3, Quantitative Finance Research Centre, University of Technology, Sydney.
  • Handle: RePEc:uts:rpaper:3
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    File URL: http://www.qfrc.uts.edu.au/research/research_papers/rp3.pdf
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    7. Seung‐Ryong Yang & B. Wade Brorsen, 1995. "Price limits as an explanation of thin‐tailedness in pork bellies futures prices," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 15(1), pages 45-59, February.
    8. Christopher K. Ma & Ramesh P. Rao & R. Stephen Sears, 1989. "Limit moves and price resolution: The case of the treasury bond futures market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 9(4), pages 321-335, August.
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    Citations

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    Cited by:

    1. Smimou, Kamal, 2006. "Estimation of Canadian commodity market risk premiums under price limits: Two-phase fuzzy approach," Omega, Elsevier, vol. 34(5), pages 477-491, October.
    2. Levy, Tamir & Yagil, Joseph, 2005. "Observed versus theoretical prices under price limit regimes," Journal of Economics and Business, Elsevier, vol. 57(3), pages 208-237.
    3. Wong, Woon K. & Liu, Bo & Zeng, Yong, 2009. "Can price limits help when the price is falling? Evidence from transactions data on the Shanghai Stock Exchange," China Economic Review, Elsevier, vol. 20(1), pages 91-102, March.
    4. Du, Yan & Liu, Qianqiu & Rhee, S. Ghon, 2006. "An Anatomy of the Magnet Effect: Evidence from the Korea Stock Exchange High-Frequency Data," CEI Working Paper Series 2005-17, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
    5. Levy, Tamir & Qadan, Mahmod & Yagil, Joseph, 2013. "Predicting the limit-hit frequency in futures contracts," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 141-148.
    6. Hsieh, Ping-Hung & Kim, Yong H. & Yang, J. Jimmy, 2009. "The magnet effect of price limits: A logit approach," Journal of Empirical Finance, Elsevier, vol. 16(5), pages 830-837, December.

    More about this item

    Keywords

    price limits; target zones; gravitation; mean reversion;

    JEL classification:

    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold 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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