On commodity price limits |
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Authors: | Rajkumar Janardanan Xiao Qiao K Geert Rouwenhorst |
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Institution: | 1. SummerHaven Investment Management, LLC, Stamford, Connecticut;2. Paraconic Technologies US Inc, New York, New York;3. Yale School of Management, Yale University, New Haven, Connecticut |
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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 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. |
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Keywords: | circuit breakers commodity futures commodity options price limits speculation speculative trading |
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