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

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  • Marcelo Fernandes
  • Marco Aurélio Dos Santos Rocha

Abstract

This article investigates the impact of price limits on the Brazilian futures markets using high frequency data. The aim is to identify whether there is an ex ante cool-off or magnet effect. For that purpose, we examine a tick-by-tick data set that includes all contracts on the São Paulo stock index futures traded on the Brazilian Mercantile and Futures Exchange (BM&F) from January 1997 to December 1999. The results indicate that, altogether, there is a dominant cool-off effect in play and that the latter is much stronger for the floor rather than ceiling price. This explains why we observe more hits to the ceiling rather than to the floor in our sample despite the fact it covers one of the most turbulent periods for emerging markets. We then build a trading strategy that accounts for the cool-off effect in the conditional mean so as to demonstrate that the latter has not only statistical but also economic significance. The Sharpe ratio is indeed way superior to the buy-and-hold benchmarks we consider. Copyright , Oxford University Press.

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  • Marcelo Fernandes & Marco Aurélio Dos Santos Rocha, 0. "Are price limits on futures markets that cool? Evidence from the Brazilian Mercantile and Futures Exchange," Journal of Financial Econometrics, Oxford University Press, vol. 5(2), pages 219-242.
    • Handle: RePEc:oup:jfinec:v:5:y::i:2:p:219-242
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    1. Wong, Woon K. & Chang, Matthew C. & Tu, Anthony H., 2009. "Are magnet effects caused by uninformed traders? Evidence from Taiwan Stock Exchange," Pacific-Basin Finance Journal, Elsevier, vol. 17(1), pages 28-40, January.
    2. Imtiaz Mohammad Sifat & Azhar Mohamad, 2019. "Circuit breakers as market stability levers: A survey of research, praxis, and challenges," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 24(3), pages 1130-1169, July.
    3. Wong, Woon K. & Liu, Bo & Zeng, Yong, 2009. "Can price limits help when the price is falling? Evidence from transactions data on the Shanghai Stock Exchange," China Economic Review, Elsevier, vol. 20(1), pages 91-102, March.
    4. Levy, Tamir & Qadan, Mahmod & Yagil, Joseph, 2013. "Predicting the limit-hit frequency in futures contracts," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 141-148.

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    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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