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Migration of Price Discovery With Constrained Futures Markets

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Abstract

This paper investigates the information content of futures option prices when the futures price is regulated while the futures option price itself is not. The New York Board of Trade provides the empirical setting for this type of dichotomy in regulation. Most commodity derivatives markets regulate prices of all derivatives on a particular commodity simultaneously. NYBOT has taken an almost unique position by imposing daily price limits on their futures contracts while leaving the options prices on these futures contracts unconstrained. The study takes a particular interest in the volatility and futures prices of the options-implied risk neutral density when the underlying futures contract is locked limit.

Suggested Citation

  • 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.
  • Handle: RePEc:uts:rpaper:70
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    File URL: http://www.qfrc.uts.edu.au/research/research_papers/rp70.pdff
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    References listed on IDEAS

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    1. Jacquier, Eric & Jarrow, Robert, 2000. "Bayesian analysis of contingent claim model error," Journal of Econometrics, Elsevier, vol. 94(1-2), pages 145-180.
    2. Jackwerth, Jens Carsten & Rubinstein, Mark, 1996. " Recovering Probability Distributions from Option Prices," Journal of Finance, American Finance Association, vol. 51(5), pages 1611-1632, December.
    3. 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.
    4. Gael M. Martin & Catherine S. Forbes & Vance L. Martin, 2005. "Implicit Bayesian Inference Using Option Prices," Journal of Time Series Analysis, Wiley Blackwell, vol. 26(3), pages 437-462, May.
    5. 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.
    6. Hall, Anthony D & Kofman, Paul, 2001. "Regulatory Tools and Price Changes in Futures Markets," Australian Economic Papers, Wiley Blackwell, vol. 40(4), pages 520-540, December.
    7. Subrahmanyam, Avanidhar, 1994. " Circuit Breakers and Market Volatility: A Theoretical Perspective," Journal of Finance, American Finance Association, vol. 49(1), pages 237-254, March.
    8. Barone-Adesi, Giovanni & Whaley, Robert E, 1987. " Efficient Analytic Approximation of American Option Values," Journal of Finance, American Finance Association, vol. 42(2), pages 301-320, June.
    9. 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).
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    Cited by:

    1. Kapil Gupta & Balwinder Singh, 2007. "Investigating the Pricing Efficiency of Indian Equity Futures Market," Management and Labour Studies, XLRI Jamshedpur, School of Business Management & Human Resources, vol. 32(4), pages 486-512, November.
    2. Gabriele Fiorentini & Enrique Sentana & Neil Shephard, 2004. "Likelihood-Based Estimation of Latent Generalized ARCH Structures," Econometrica, Econometric Society, vol. 72(5), pages 1481-1517, September.

    More about this item

    Keywords

    option implied density; price limits;

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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