On Commodity Price Limits
Journal of Futures Markets, Forthcoming
30 Pages Posted: 27 Nov 2017 Last revised: 12 Jul 2019
Date Written: July 30, 2018
Abstract
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 non-commercial 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.
Keywords: Commodity Futures, Price Limits, Speculation, Commodity Options, Circuit Breakers, Speculative Trading
JEL Classification: G13, G14
Suggested Citation: Suggested Citation