 Will tighter futures price limits decrease hedge effectiveness?Jonathan Dark Journal of Banking & Finance, 2012, vol. 36, issue 10, 2717-2728 Abstract: The events triggered by the Global Financial Crisis (GFC) have led to calls for the regulation of financial markets. Given that regulation may involve opportunity costs, this paper examines whether tighter futures price limits can reduce the effectiveness of a futures hedge. We propose a new model that uncovers the underlying spot-futures dynamics when futures prices are subject to limits. We use the model to determine the maximum number of limit days that can occur before minimum variance hedging outcomes are adversely affected. Application of this model to the US soybean and corn markets reveals that existing limits do not reduce hedge effectiveness. If the frequency of limit days increases from current levels of 1% to approximately 3–4%, conventional hedging approaches will experience economically and statistically significant increases in portfolio variance. These results are important for hedgers, clearing houses and regulators in light of the recent calls for derivatives regulation. Keywords: Price limits; Long memory; Maturity effects; Tobit (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:36:y:2012:i:10:p:2717-2728 DOI: 10.1016/j.jbankfin.2011.07.020 Access Statistics for this article Journal of Banking & Finance is currently edited by Ike Mathur More articles in Journal of Banking & Finance from Elsevier |
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