Abstract
Numerous futures markets in the US and many stock markets around the world set a “limit” price before each trading session, based on the settlement price at the end of the previous trading day. Price limits are boundaries set by market regulators to restrict large daily fluctuations in the price of securities. Once the return limit is triggered, traders cannot observe the equilibrium return that would have prevailed in the absence of such regulation. We develop an innovative approach for forecasting security returns (and prices) in a market regulated by price limits. Our forecasting model allows for multiple limit-hits. The model is robust, straightforward and easy for practitioners to use. A few numerical predictions are provided for hypothetical securities, and for seven traded futures contracts.
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Harel, A., Harpaz, G. & Yagil, J. A new paradigm for forecasting security returns in a market regulated by price limits. Rev Quant Finan Acc 35, 113–121 (2010). https://doi.org/10.1007/s11156-009-0138-7
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DOI: https://doi.org/10.1007/s11156-009-0138-7