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

Anthony Hall, Paul Kofman and Ron Guido
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Paul Kofman: University of Melbourne

No 3, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

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.

Keywords: price limits; target zones; gravitation; mean reversion (search for similar items in EconPapers)
JEL-codes: C24 G14 G15 (search for similar items in EconPapers)
Pages: 28 pages
Date: 1998-12-01
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Citations: View citations in EconPapers (6)

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