Rational price limits in futures markets: tests of a simple optimizing model

Lucy Ackert and William C. Hunter

Review of Financial Economics, 1994, vol. 4, issue 1, 93-108

Abstract: This paper tests a simple descriptive model of optimal futures price limits under the assumption that futures exchanges operate under the criterion of minimizing the long‐run average cost associated with market making. This cost is composed of a “running cost,” reflecting the expenses associated with providing for the continuous operation of the market, and a cost associated with trading interruptions resulting from limit moves. The model implies that the optimal daily limit increases with the cost of trading interruptions and decreases with running costs and that at the margin, the limit should be set so as to just balance these costs. The model is tested using price limits in place on ten contracts traded on the Chicago Board of Trade between 1977 and 1979. The econometric results indicate that for seven of the ten contracts examined, the actual level of the daily price limit is, on average, equal to that implied by the optimizing model.

Date: 1994
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://doi.org/10.1016/1058-3300(94)90008-6

Related works:
Journal Article: Rational price limits in futures markets: tests of a simple optimizing model (1994)
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:revfec:v:4:y:1994:i:1:p:93-108

Access Statistics for this article

More articles in Review of Financial Economics from John Wiley & Sons
Bibliographic data for series maintained by Wiley Content Delivery ().