Abstract
Price limits are applied to control risks in various futures mar kets. In this research, we proposed an adapted autoregressive model for the observed futures return by introducing dummy variables that represent limit moves. We also proposed a stochastic volatility model with dummy variables. These two models are used to investigate the existence of price de layed discovery effect and volatility spillover effect from price limits. We give an empirical study of the impact of price limits on copper and natural rubble futures in Shanghai Futures Exchange (SHFE) by using MCMC method. It is found that price limits are efficient in controlling copper futures price, but the rubber futures price is distorted significantly. This implies that the effects of price limits are significant for products with large fluctuation and frequent limits hit.
Highlights
More than two thirds of the organized markets in the world have price limits (Hall and Kofman, 2001)
We proposed an autoregressive model for the observed futures return by introducing dummy variables that represent limit moves
We investigate the existence of price delayed discovery effect and volatility spillover effect of copper and natural rubber futures in Shanghai Futures Exchange (SHFE)
Summary
More than two thirds of the organized markets in the world have price limits (Hall and Kofman, 2001). The effectiveness of price limits are usually examined according to price delayed discovery effect, volatility spillover effect and trading disturbance effect. Under hypothesis of price delayed discovery effect, price will continue to reach equilibrium price during the following trading days. Under hypothesis of volatility spillover effect, trading following a limit move will reflect unrealized fluctuations of that day. If the hypotheses of price delayed discovery effect and volatility spillover effect are accepted, it is considered that price limits are useless. We proposed a stochastic volatility model with dummy variables Using these two models, we investigate the existence of price delayed discovery effect and volatility spillover effect of copper and natural rubber futures in SHFE.
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