Forecasting futures returns in the presence of price limits

Arie Harel, Giora Harpaz and Joseph Yagil

Journal of Futures Markets, 2005, vol. 25, issue 2, 199-210

Abstract: In a futures market with a daily price‐limit rule, trading occurs only at prices within limits determined by the previous day's settlement price. Price limits are set in dollars but can be expressed as return limits. When the daily return limit is triggered, the true equilibrium futures return (and price) is unobservable. In such a market, investors may suffer from information loss if the return “moves the limit.” Assuming normally distributed futures returns with unknown means but known volatilities, we develop a Bayesian forecasting model in the presence of return limits and provide some numerical predictions. Our innovation is the derivation of the predictive density for futures returns in the presence of return limits. © 2005 Wiley Periodicals, Inc. Jrl Fut Mark 25:199–210, 2005

Date: 2005
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