Futures price limit moves as options

Mark E. Holder, Christopher K. Ma and James E. Mallett

Journal of Futures Markets, 2002, vol. 22, issue 9, 901-913

Abstract: This note demonstrates that an asset's price in an environment with price limit rules can be replicated by the price of a portfolio consisting of a riskless asset and two synthetic options. A procedure is developed to unbundle the unobservable option values imbedded in the actual futures price and impute a theoretical true futures price. Using this framework, evidence from the Treasury Bond futures market suggests that theoretical true futures prices diverge from actual futures prices, on average, 3 h prior to the activation of price limit rules, indicating that price limit moves might be predictable. The reversal of both the actual futures prices and the theoretical futures prices back within the limit range after a limit move provides support for the possibility that traders tend to overreact when market prices are near price limits. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:901–913, 2002

Date: 2002
References: Add references at CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
http://hdl.handle.net/

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wly:jfutmk:v:22:y:2002:i:9:p:901-913

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0270-7314

Access Statistics for this article

Journal of Futures Markets is currently edited by Robert I. Webb

More articles in Journal of Futures Markets from John Wiley & Sons, Ltd.
Bibliographic data for series maintained by Wiley Content Delivery ().