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On commodity price limits
Author(s) -
Janardanan Rajkumar,
Qiao Xiao,
Rouwenhorst K. Geert
Publication year - 2019
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.21999
Subject(s) - futures contract , speculation , economics , volatility (finance) , price discovery , financial economics , normal backwardation , contango , futures market , monetary economics , mid price , commodity , price level , macroeconomics , finance
This paper examines the behavior of futures prices and trader positions around the occurrence of price limits in commodity futures markets. We ask whether limit events are the result of shocks to fundamental volatility or the result of temporary volatility induced by the trading of noncommercial market participants (speculators). We find little evidence that limits events are the result of speculative activity, but instead associated with shocks to fundamentals that lead to persistent price changes. When futures trading halts price discovery migrates to options markets, but option prices provide a biased estimate of subsequent future prices when trading resumes.