Theoretical futures price

Theoretical futures price

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This allows the testing of the information and overreaction hypotheses when the theoretical futures price is examined around limit moves.
Holder, Ma, and Mallett (HMM) utilize an iterative search procedure to simulate the average actual and implied theoretical futures price changes.
If the limit moves are caused by traders' short-term overreactions, then post-limit moves of the true theoretical futures price should occur within the limit range.
From Figure 2, the magnitude of the theoretical futures price changes for the sample of successive daily limit moves are clearly larger than that of the sample of single day limit moves.
Figure 4 also demonstrates the theoretical futures price changes for both samples.
As the magnitude of the difference between the theoretical futures prices and the actual futures prices is significantly larger for limit moves resulting in trading halts for the entire trading day, as compared to limit moves on trading days in which trading resumes, intraday trading halts and consecutive daily limit moves can also be predicted.
By comparing observed futures prices with theoretical futures prices (as determined by a cost-of-carry model), they find an S-shaped relationship in one grain market, indicating that price limits may stabilize prices as traders anticipate the potential effects of price limits.
Ackert and Hunter (1994) also compared observed futures prices with theoretical futures prices.
On the other hand, if limit moves are caused by short-term overreaction, the limit provides a cooling environment and the true theoretical futures prices should revert back to the true level.
Moreover, even within the limit range, the theoretical futures prices are still significantly lower (higher) than the actual futures prices after the down (up) limit moves, at the 1 percent level.
The MMI divisors which must be multiplied by the reported index value to convert the index point value to the index dollar value used in computing a theoretical futures price were obtained from the Chicago Board of Trade.
The theoretical futures mispricing is calculated as the difference between the actual and the theoretical futures price at time t.

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