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Price Limits (price + limit)

Distribution by Scientific Domains
Business, Economics, Finance and Accounting92%

Selected Abstracts

On the Magnet Effect of Price Limits

EUROPEAN FINANCIAL MANAGEMENT, Issue 5 2007
David Abad
G1; G14; D44 Abstract The ,magnet' or ,gravitational' effect hypothesis asserts that, when trading halts are rule-based, investors concerned with a likely impediment to trade advance trades in time. This behaviour actually pushes prices further towards the limit. Empirical studies about the magnet effect are scarce, most likely because of the unavailability of data on rule-based halts. In this paper, we use a large database from the Spanish Stock Exchange (SSE), which combines intraday stock specific price limits and short-lived rule-based call auctions to stabilise prices, to test this hypothesis. The SSE is particularly well suited to test the magnet effect hypothesis since trading halts are price-triggered and, therefore, predictable to some extent. Still, the SSE microstructure presents two particularities: (i) a limit-hit triggers an automatic switch to an alternative trading mechanism, a call auction, rather than a pure halt; (ii) the trading halt only lasts 5 minutes. We find that, even when prices are within a very short distance to the price limits, the probability of observing a limit-hit is unexpectedly low. Additionally, prices either initiate reversion (non limit-hit days) or slow down gradually (limit-hit days) as they come near the intraday limits. Finally, the most aggressive traders progressively become more patient as prices approach the limits. Therefore, both the price patterns and the trading behaviour reported near the limits do not agree with the price limits acting as magnetic fields. Consequently, we conclude that the switching mechanism implemented in the SSE does not induce traders to advance their trading programs in time. [source]

An Analysis of the Magnet Effect under Price Limits,

INTERNATIONAL REVIEW OF FINANCE, Issue 1-2 2009
DAPHNE YAN DU
ABSTRACT Using the Korea Stock Exchange's transaction data and limit order book, we document the accelerating patterns of market activity before limit hits. We confirm the existence of the magnet effect from several key market microstructure variables, using a parsimonious quadratic function of the time until the price limit hit. In addition, this paper is the first to isolate the intraday momentum effect from the magnet effect during the period before stock prices hit daily price limits. [source]

Forecasting futures returns in the presence of price limits

THE JOURNAL OF FUTURES MARKETS, Issue 2 2005
Arie Harel
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 [source]

Cost of compliance assessments and the water industry in England and Wales

ENVIRONMENTAL POLICY AND GOVERNANCE, Issue 5 2002
Paul McMahon
Environmental compliance cost assessments (CCAs) are being increasingly demanded and used in the water industry, in order to allow regulators to balance conflicting objectives. The 1999 periodic review of water company price limits concerned massive environmental expenditures, and consequently major use of CCAs. There were major differences between Ofwat (the economic regulator) and the water companies relating to the compliance costs submitted. The assumptions used by Ofwat vis-à-vis future efficiency savings and the cost of capital are notable causes of the differentials. There are a number of other reasons why this differential might have arisen, including gaming. However, the principal cause might be more a real lack of knowledge on the part of companies of future efficiencies and the actual costs of projects. The CCAs produced in the water industry have had massive impact on policy design. A number of specific improvements to CCA are identified. These changes relate to increased collaboration between industry and regulators in working groups to design/approve, inter alia, regulatory methodologies for use in the periodic review. More detailed guidance is required for preparation of a CCA. Further use of compliance cost databases is recommended. The entire process would be facilitated by increased training and awareness raising of economics for the engineers largely responsible for preparation of CCAs. Copyright © 2002 John Wiley & Sons, Ltd. and ERP Environment. [source]

On the Magnet Effect of Price Limits

EUROPEAN FINANCIAL MANAGEMENT, Issue 5 2007
David Abad
G1; G14; D44 Abstract The ,magnet' or ,gravitational' effect hypothesis asserts that, when trading halts are rule-based, investors concerned with a likely impediment to trade advance trades in time. This behaviour actually pushes prices further towards the limit. Empirical studies about the magnet effect are scarce, most likely because of the unavailability of data on rule-based halts. In this paper, we use a large database from the Spanish Stock Exchange (SSE), which combines intraday stock specific price limits and short-lived rule-based call auctions to stabilise prices, to test this hypothesis. The SSE is particularly well suited to test the magnet effect hypothesis since trading halts are price-triggered and, therefore, predictable to some extent. Still, the SSE microstructure presents two particularities: (i) a limit-hit triggers an automatic switch to an alternative trading mechanism, a call auction, rather than a pure halt; (ii) the trading halt only lasts 5 minutes. We find that, even when prices are within a very short distance to the price limits, the probability of observing a limit-hit is unexpectedly low. Additionally, prices either initiate reversion (non limit-hit days) or slow down gradually (limit-hit days) as they come near the intraday limits. Finally, the most aggressive traders progressively become more patient as prices approach the limits. Therefore, both the price patterns and the trading behaviour reported near the limits do not agree with the price limits acting as magnetic fields. Consequently, we conclude that the switching mechanism implemented in the SSE does not induce traders to advance their trading programs in time. [source]

An Analysis of the Magnet Effect under Price Limits,

INTERNATIONAL REVIEW OF FINANCE, Issue 1-2 2009
DAPHNE YAN DU
ABSTRACT Using the Korea Stock Exchange's transaction data and limit order book, we document the accelerating patterns of market activity before limit hits. We confirm the existence of the magnet effect from several key market microstructure variables, using a parsimonious quadratic function of the time until the price limit hit. In addition, this paper is the first to isolate the intraday momentum effect from the magnet effect during the period before stock prices hit daily price limits. [source]

SWITCHING TO A TEMPORARY CALL AUCTION IN TIMES OF HIGH UNCERTAINTY

THE JOURNAL OF FINANCIAL RESEARCH, Issue 1 2010
David Abad
Abstract We evaluate a stock-specific circuit breaker implemented in several European stock exchanges, which consists of a short-lived call auction triggered by intraday stock-specific price limits. It differs from U.S. trading halts in that it is short-lived and nondiscretionary, and a trading mechanism (continuous or discrete) is always going. It differs from daily price limits in that trade prices are not restricted once the limit is hit. Intraday price ranges are smaller and adjusted to the recent volatility, so that limit hits are more frequent. We contribute to the debate about circuit breakers by enlarging the span of these mechanisms studied. [source]

Forecasting futures returns in the presence of price limits

THE JOURNAL OF FUTURES MARKETS, Issue 2 2005
Arie Harel
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 [source]

The effectiveness of coordinating price limits across futures and spot markets

THE JOURNAL OF FUTURES MARKETS, Issue 6 2003
Pin-Huang Chou
We extend the work of Brennan (1986) to investigate whether the imposition of spot price limits can further reduce the default risk and lower the effective margin requirement for a futures contract that is already under price limits. Our results show that spot price limits do indeed further reduce the default risk and margin requirement effectively. In addition, the more precise the information is that comes from the spot market, the more the spot price limit rule constrains the information available to the losing party. The default probability, contract costs, and margin requirements are then lowered to a greater degree. Furthermore, for a given margin, both spot price limits and futures price limits can partially substitute for each other in ensuring contract performance. The common practice of imposing equal price limits on both the spot and futures markets, though not coinciding with the efficient contract design, has a lower contract cost and margin requirement than that without imposing spot price limits. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:577,602, 2003 [source]

Limits to linear price behavior: futures prices regulated by limits

THE JOURNAL OF FUTURES MARKETS, Issue 5 2001
Anthony D. Hall Professor of Finance, Economics
This article analyzes the behavior of futures prices when the exchange is regulated by price limits. With a model analogous to exchange-rate target-zone models, we tested for the existence of a nonlinear S-shape relation between observed and theoretical futures prices. This phenomenon reflects the adjustments in traders' expectations even when limits are not actually hit. The approach is illustrated for five agricultural futures contracts traded at the Chicago Board of Trade. There is some evidence of nonlinearity in quiet periods. In cases of fundamental realignments, that is, volatile periods, this nonlinearity disappears. © 2001 John Wiley & Sons, Inc. Jrl Fut Mark 21:463,488, 2001 [source]