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Forecasting futures returns in the presence of price limits

✍ Scribed by Arie Harel; Giora Harpaz; Joseph Yagil

Publisher: John Wiley and Sons
Year: 2004
Tongue: English
Weight: 119 KB
Volume: 25
Category: Article
ISSN: 0270-7314
DOI: 10.1002/fut.20141

No coin nor oath required. For personal study only.

✦ Synopsis

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

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