Reiffen, David and Buyuksahin, Bahattin (2010): The puzzle of privatelyimposed price limits: are the limits imposed by financial exchanges effective? Published in: Aestimatio No. 1 (December 2010): pp. 134.

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Abstract
Some of the world’s largest futures exchanges impose daily limits on the price movements of individual contracts. Using data from three of the most active US commodity futures contracts, we show that these price restrictions are largely ineffective because traders are able to take similar positions using other contracts. When price limits become binding on the futures market, the associated (but unrestricted) options market becomes the price discovery market: much of the trading that would have occurred on the futures market migrates to the options market, and options prices accurately predict the (unconstrained) futures price the next day. We also show that the presence of options mitigates the effect of price limits on information revelation by documenting that futures markets reflect more accurate information on days following limit hits when the associated options were trading on the previous day. Overall, our evidence suggests that price limits in US futures markets have little effect on prices when options markets exist.
Item Type:  MPRA Paper 

Original Title:  The puzzle of privatelyimposed price limits: are the limits imposed by financial exchanges effective? 
English Title:  the Puzzle of Privatelyimposed Price limits: Are the Limits Imposed by Financial Exchanges Effective? 
Language:  English 
Keywords:  Price limits, Regulatory evasion, Putcall parity, Satellite market, Price discovery 
Subjects:  G  Financial Economics > G1  General Financial Markets > G10  General G  Financial Economics > G1  General Financial Markets > G13  Contingent Pricing ; Futures Pricing 
Item ID:  35927 
Depositing User:  IEB Research Department 
Date Deposited:  14 Jan 2012 02:43 
Last Modified:  18 Mar 2018 18:23 
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URI:  https://mpra.ub.unimuenchen.de/id/eprint/35927 