The influence of daily price limits on trading in Nikkei futures

Abstract

Ma, Rao, and Sears (1989) study the influence of price limits on the price formation process after the market has resumed trading. They conclude that price limits serve a useful function in giving the market "time to breathe." Kim and Rhee (1997) study daily price limits on the Tokyo Stock Exchange and conclude that price limits are ineffective.

Are price limits on futures markets that cool? Evidence from the Brazilian Mercantile and Futures Exchange

“…Inspection of the parameter estimates reveals that the floor cool-off effect in the conditional mean is much stronger than the ceiling magnet effect in the conditional variance. Altogether, our results are consistent with Arak and Cook's (1997) findings that the price limits cool-off the Treasury bill futures markets and with Berkman and Steenbeek's (1998) lack of evidence supporting the magnet effect in the Nikkei futures markets. Also, the ceiling magnet effect in the volatility partially accords with Subrahmanyam's (1994) conclusion that the volatility increases once prices approach the limits.…”

“…In contrast, Kim and Yang evince that the price limits induce overreaction when prices approach the limits, though there is a calming effect once prices hit a limit. Berkman and Steenbeek (1998) use Nikkei futures transaction data, from two distinct exchanges, to evaluate Subrahmanyam's (1994) hypotheses. Although they find no relation between the distance from previous' day closing price and the stock index futures return, they argue that the contemporaneous link between the two markets may mitigate the effect of price limits.…”

The magnet effect of price limits: A logit approach

“…In futures markets, Arak and Cook (1997), Berkman and Steenbeek (1998), and Hall and Kofman (2001) find no magnet effect, whereas Holder et al (2002) and Belcher et al (2003) find evidence of it. Results from stock markets also conflict: Cho et al (2003) and Nath (2003) find support for the magnet effect, but they cannot explain theoretically why it occurs only when the price approaches the upper limit (Cho et al, 2003) or the lower limit (Nath 2003).…”

Observed versus theoretical prices under price limit regimes

“…Arak and Cook (1997) find evidence that the magnet effect does exist. Berken and Steenbeek (1998) use intraday data of the Nikkei futures, and find that the gravitation effect does not exist. Cho, Russell, Tiao, and Tsay (2002) find evidence consistent with the magnet effect.…”