The influence of daily price limits on trading in Nikkei futures

Following the crashes of 1987 and 1989, there has been much discussion in policy circles about the use of price limits on financial markets. Proponents argue that price limits reduce overreactions, while others suggest that price limits make trading impossible and therefore harm the price discover p...

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Bibliographic Details
Published in:The journal of futures markets 1998-05, Vol.18 (3), p.265-279
Main Authors: Berkman, Henk, Steenbeek, Onno W.
Format: Article
Language:English
Subjects:
Capital market
Comparative analysis
Economic models
Futures
Futures exchanges
Futures market
Impact analysis
Influence
Market structure
Price theory
Pricing
Pricing policies
Securities regulations
Stock exchange
Stock prices
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Summary:Following the crashes of 1987 and 1989, there has been much discussion in policy circles about the use of price limits on financial markets. Proponents argue that price limits reduce overreactions, while others suggest that price limits make trading impossible and therefore harm the price discover process. Most empirical studies concentrate on the influence of price limits on the price formation process after they have been triggered. A paper presents an empirical study of the influence of price limits on the price formation process before they come into effect. Several authors have suggested that price limits are likely to generate a gravitation or magnet effect. It is shown that price differences between the OSE and SIMEX are very small, which suggests that if a gravitation effect exists due to the strict price limits on the OSE, it influences prices on the OSE and SIMEX in the same way. Uncensored data from SIMEX are used to study whether price limits on the OSE result in systematic price movements in the direction of the price limit as predicted by the gravitation effect.
ISSN:0270-7314
1096-9934
DOI:10.1002/(SICI)1096-9934(199805)18:3<265::AID-FUT2>3.0.CO;2-I