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The Effects of Daily Price Limits on Cotton Futures and Options Trading, Research Paper 9627

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The Effects of Daily Price Limits on Cotton Futures and Options Trading, Research Paper 9627

DATE: August 1996

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ABSTRACT: The New York Cotton Exchange (NYCE) imposes price limits on the trading of cotton futures, whereby the price at which cotton futures trade during a day is restricted to a band centered around the previous day's close. However, the NYCE has no such restrictions on the trading of options on cotton futures. These exchange rules allow for essentially a controlled experiment to study the market participants' responses to the price limits on futures. We show that, as a higher fraction of the trading day is constrained by the price limit, futures volume significantly decreases, options volume significantly increases, but the average aggregate volume of cotton trade remains unchanged. The empirical analysis indicates that market participants react rationally to the price limit in the futures market by transferring their trading activity to a market without price limits.

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Evans, Joan and Mahoney, James M. "The Effects of Daily Price Limits on Cotton Futures and Options Trading, Research Paper 9627," Research Papers (Federal Reserve Bank of New York) (August 1996). https://fraser.stlouisfed.org/title/6570/item/615542, accessed on March 22, 2023.

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THEMES: CLASSIFICATION:
  • lcc: HG136 .R45 no.9627
IDENTIFIERS:
  • oclc: 35756524
  • fip:fednrp:9627:
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