As summarized by Xiao Qiao, Ph.D., Paraconic Technologies US Inc. and Member of the GCARD’s Editorial Advisory Board
This digest article examines the behavior of futures prices and trader positions around price limits in commodity futures markets. The authors ask whether limit events are the result of shocks to fundamental volatility or the result of temporary volatility induced by the trading of non-commercial market participants (speculators). The paper finds little evidence that limit events are the result of speculative activity, but instead are associated with shocks to fundamentals that lead to persistent price changes. When futures trading halts, price discovery migrates to options markets, but option prices provide a biased estimate of subsequent futures prices when trading resumes.