Options-based forecasts of futures prices in the presence of limit moves

Egelkraut, Thorsten M.; Garcia, Philip; Sherrick, Bruce J.

doi:10.1080/00036840500427478

Cited by 7 publications

(3 citation statements)

References 24 publications

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“…2 In addition to being a forward-looking measure of market impact, another advantage of implied volatility is that option price changes are either exempt from price limits or rarely impacted by price limits (due to delta effects). Limit moves in futures prices generally are associated with the arrival of new information and the resolution of large amounts of uncertainty (Egelkraut, Garcia, & Sherrick, 2007). Since on limit move days futures prices do not reflect the ''true'' or ''full'' market reaction to new information, the use of futures prices to measure the impact of scheduled news announcements may result in downward-biased estimates of impact.…”

Section: Introductionmentioning

confidence: 99%

Impact of WASDE reports on implied volatility in corn and soybean markets

et al. 2008

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This study investigates the impact of U.S. Department of Agriculture World Agricultural Supply and Demand Estimate (WASDE) reports on implied volatility in corn and soybean markets over 1985 to 2002. If WASDE reports resolve uncertainty, implied volatility should drop immediately after release of the reports. Results show that WASDE reports lead to a statistically significant reduction of implied volatility that averages 0.7 percentage points for corn and 0.8 percentage points for soybeans. The magnitude of the reduction is largest for the group of WASDE reports containing both domestic and international situation and outlook information. This group of reports reduces implied volatility by an average of 1.1 percentage points in corn and by almost 1.5 percentage points in soybeans. Results also reveal that the market impact of WASDE reports is strongest in the most recent 1996 to 2002 subperiod. Overall, the results indicate that WASDE reports provide valuable information to corn and soybean market participants. [JEL classifications: Q100, Q110, Q130]. © 2008 Wiley Periodicals, Inc.

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Section: Introductionmentioning

confidence: 99%

Impact of WASDE reports on implied volatility in corn and soybean markets

et al. 2008

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“…Poteshman (2000) suggested that a portion of the apparent bias in the Black-Scholes model may be attributed to the measurement errors in realized volatility. Egelkraut et al (2007) found that the simultaneous estimation approach accounts for the abrupt changes in implied volatility associated with limit moves and generates more accurate price forecast than conventional methods that rely only on implied variable. Maris et al (2007) pointed out that successful volatility forecasts in terms of directional accuracy was found to be sufficient for positive results.…”

Section: Literature Reviewmentioning

confidence: 98%

The limitation of monotonicity property of option prices: an empirical evidence

2011

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Many option pricing models are based on the assumption that the underlying asset price follows one-dimensional diffusion process. An alternative approach is to test the properties that should hold for all models based on a given stochastic process for the underlying asset. Following Perignon (2006), we test the empirical validity of the monotonicity property for option prices by collecting all transaction data from 1 July 2006 to 31 December 2006 for option contracts traded on the Taiwan Futures Exchange (TAIFEX). We find that sampled intraday option prices violate the monotonicity property between 29.97% and 57% of the time, and that call and put prices often increase, or decrease, together. We also find evidence to show that the frequent violations of the monotonicity property are to a large extent attributable to microstructure effects and that they arise from rational trading tactics.

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“…Following the method proposed by Egelkraut et al (2007), we estimate the options‐implied futures price

{\overset{truê}{F}}_{d, c}

using intraday options transactions observed when the underlying futures contract is locked at the limit 13 . Because no limits are imposed on the options contract, its price can continue to adjust on locked‐limit days even though the futures price remains bounded for the current trading day.…”

Section: Measuring Market Activities Around Limit Movesmentioning

confidence: 99%

Are price limits cooling off agricultural futures markets?

Serra

2022

American J Agri Economics

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In the past few years, the lean hog and live cattle futures markets have experienced significantly heightened volatility and frequent limit moves. In this paper, we study whether price limits help resolve uncertainty and facilitate liquidity provision in the two markets and how they affect trading in the limit-free options market. In contrast to previous literature that is based on daily data, we use intraday futures and options data from 2014 to 2019 that allows for a better characterization of market behavior around limit moves. Consistent with microstructure theories, we find that price limits neither reduce volatility nor improve liquidity. Instead, they add to the high uncertainty that precedes the limit move, leading to significantly higher volatility and lower liquidity when trading resumes. Further, contrary to the notion that trading migrates to the limit-free options market, options volume drops and liquidity drains during limit moves. The options-implied futures price is only a biased, inefficient, and highly noisy estimate of the equilibrium futures price on locked-limit days. Overall, the findings suggest that rather than allowing the markets to cool off, price limits adversely affect market quality in presence of large price movements.

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Options-based forecasts of futures prices in the presence of limit moves

Cited by 7 publications

References 24 publications

Impact of WASDE reports on implied volatility in corn and soybean markets

Impact of WASDE reports on implied volatility in corn and soybean markets

The limitation of monotonicity property of option prices: an empirical evidence

Are price limits cooling off agricultural futures markets?

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