An Empirical Comparison of Price-Limit Models

20 Pages Posted: 9 Jan 2008

See all articles by Tamir Levy

Tamir Levy

Netanya Academic College

Joseph Yagil

University of Haifa - Graduate School of Business

Abstract

Using futures traded on the Chicago Board of Trade, Chicago Mercantile Exchange and New York Board of Trade, we test six alternative models of the return-generating process (RGP) in futures exchanges that adopt a price-limit regime. We rank the six models according to their return-prediction ability, based on the mean square error criterion, and we find that the near-limit model performed best for both the estimation period and the prediction period. A reliable prediction of the expected return can have important implications for both traders and policy makers, concerning related issues such as the employment of long or short strategy, margin requirements and the effectiveness of the price limit mechanism.

Suggested Citation

Levy, Tamir and Yagil, Yosef, An Empirical Comparison of Price-Limit Models. International Review of Finance, Vol. 6, No. 3-4, pp. 157-176, September/December 2006. Available at SSRN: https://ssrn.com/abstract=1081743 or http://dx.doi.org/10.1111/j.1468-2443.2007.00063.x

Tamir Levy

Netanya Academic College

1 University St
Netanya 42100, 4223587
Israel

Yosef Yagil (Contact Author)

University of Haifa - Graduate School of Business ( email )

Haifa 31905
Israel
972-4-240085 (Phone)
972-4-240059 (Fax)

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