Effects Of Price Limits Research Articles

Effectiveness of price limits: Evidence from China's ChiNext market.

Starting from August 24, 2020, the daily stock price limits in China's ChiNext market have been adjusted from 10% to 20%. We use this reform to study the effectiveness of price limits in China's stock market. We test four hypotheses about price limits: delayed price discovery, volatility spillover, trading interference, and magnet effect. Using the event study method, we examine the differences in the behavior of stock price, trading volume, and volatility before and after the reform. We confirm the delayed price discovery, volatility spillover and trading interference hypothesis of price limits, and find that these negative effects of price limits are more serious when lower limits are hit. In addition, we examine the distribution of large price movements before and after the reform and find no evidence of the magnet effect of price limits. The present research has important implications for policymakers and investors in China's stock market.

Price-limit effectiveness: evidence from the Borsa Istanbul (BIST)

PurposeThis paper aims to analyze the impact of price-limit hits by hit type and when such hits start and stop using intraday trades and quotes at a one-second frequency for firms included in the BIST-50 index during the 13-months starting with March 2008. Like the recent COVID-19 period, this period includes the heightened stress in global financial markets in September 2008.Design/methodology/approachUsing intra-day trades and quotes at a one-second frequency, the authors examine the market effects of price limits for firms included in the BIST-50 index during the global financial crisis. The authors compare the values of various metrics for 60 min centered on price-limit hit periods. The authors conduct robustness tests using auto regressive integrated moving average (ARIMA) models with trade-by-trade and with 3-min returns.FindingsThe findings are supportive of the following hypotheses: magnet price effects, greater informational asymmetric effects of market quality and each version of price discovery. Results are robust using samples differentiated by cross-listed status, same-day quotes instead of transaction prices and equidistant and trade-by-trade returns.Originality/valueThe authors use intraday data to reduce measurement error that is particularly pronounced when daily data are used to assess price limits that start and/or stop during a trading session. The authors contribute to the micro-structure literature by using ARIMA models with trade-by-trade and 3-min returns to alleviate some bias due to the autocorrelations in returns around price-limit hits in the presence of a magnet effect. The authors include some recent regulation changes in various countries to illustrate the importance of circuit breakers using price limits during COVID-19.

Adapted Autoregressive Model and Volatility Model with Application

Price limits are applied to control risks in various futures mar kets. In this research, we proposed an adapted autoregressive model for the observed futures return by introducing dummy variables that represent limit moves. We also proposed a stochastic volatility model with dummy variables. These two models are used to investigate the existence of price de layed discovery effect and volatility spillover effect from price limits. We give an empirical study of the impact of price limits on copper and natural rubble futures in Shanghai Futures Exchange (SHFE) by using MCMC method. It is found that price limits are efficient in controlling copper futures price, but the rubber futures price is distorted significantly. This implies that the effects of price limits are significant for products with large fluctuation and frequent limits hit.

The stabilizing effects of price limits: New evidence from jump contributed price variations

We re-examine the effects of price limits on market stabilization, arguing that the prior studies have tended to overlook the endogeneity arising from the market mechanism restrictions imposed by regulators to prevent abnormal market movements when volatility is particularly high. In order to avoid the neglected reverse causality of identifying the policy effects of price limits from the literature, we probe the problem empirically by investigating the realized jump activities by separating the ‘jump contributed price variations’ from the continuously evolved volatility. Our results reveal that whilst the pattern of realized variance across various price limits provides no clear picture of the problem, the jump components under tighter price limit intervals are found to be significantly lower. Contrary to the prior works, in which it is invariably argued that price limits have no stabilizing effect on volatility in the presence of any simultaneous bias, our findings are largely consistent with the claims by regulators that restraining price limits can effectively moderate extreme price movements. A conservative interpretation of our findings is that although adjusting the price limit may not be able to totally reduce price variations, it can at least mitigate the undesired radical price movements (jumps) that are often found to occur.

Magnet Effects of Price Limits: Evidence from a Market Liberalization Experiment

This paper tests for the existence of the magnet effect linked to price limits imposed in China's equity markets and how a market liberalization event affects trading in securities bound by price limits. The magnet effect of price limits theorises that, instead of stabilising markets, price limits act as a magnet and result in trade acceleration towards the limits, increasing the likelihood of hit and subsequent constraint on prices. This study provides evidence of the magnet effect in China and evidence that its effect magnifies following the opening of China's capital markets via the Shanghai-Hong Kong Connect. The increased magnitude of the magnet effect of price limits is due to new capital inflow from global markets via Hong Kong, as effects are greater for firms that experience the largest increase in capital inflow.

Price Limit and Volatility in Taiwan Stock Exchange: Some Additional Evidence from the Extreme Value Approach

We reexamine the effects of price limits on the stock volatility of Taiwan Stock Exchange using a new methodology based on the Extreme-Value technique. Consistent with the advocates of price limits, we find that stock market volatility is sharply moderated under more restrictive price limits.

Effects of Price Limits and Trading Halts on Volatility in Nepalese Stock Market

The paper examines empirically the impact of price limits and trading halts on stock market volatility. Circuit breakers are regulatory instruments aiming to reduce severe price volatility and provide markets with a cooling off period. However, the effectiveness of circuit breakers on the operation of these markets is disputed. While some argue that circuit breakers curb the effects of overreaction in markets and restore confidence, others argue that these trading interruptions merely prolong the price discovery process to subsequent periods. Applying serial correlation, structural stability tests and GARCH model on daily returns of different sector-wise indices of Nepal Stock Exchange from 2003 to 2011, the study investigates the impact of the regulatory instruments on conditional volatility estimation. The findings do not provide sufficient evidence to support information and overreaction hypotheses. However, the results reveal possibility of presence of gravitational effect. The stock market volatility has been found to increase slightly in the post-circuit breaker period. The results have policy implications and question the effectiveness of circuit breaker to limit stock market volatility.

Building the model of artificial stock market based on JASA

This paper introduces the major function, system framework, running mechanism and core modules of JASA, an open source auction simulator software. Then it builds a new multi-agent artificial stock market modeling platform, named JASA+ by extending, improving JASA, and adding stock market normal quotas, price limits, stock traders, bid-ask strategies and graphic reports. It studies the effects of price limits on stock market via JASA+ platform. The experimental results demonstrate that with in some extent the price limit policy could improve the market efficiency and return, and reduce the bid-ask spread. JASA+ can simulate true stock market preferably, being different from SFI-ASM, a traditional research tool. JASA+ gives researchers a new thought and method in finance markets.

Idiosyncratic Volatility Under a Price-Limit System Using Gibbs-Sampling

We examine the effects of price limits on the idiosyncratic volatility of individual stocks. When estimating idiosyncratic volatility, we adopt the Gibbs-sampling method to resolve the problem of censored returns caused by price limits. Results show that idiosyncratic volatility is significantly higher than would appear from OLS estimates using the observed censored return data. Tight price limits reduce idiosyncratic volatility, at significant cost; looser price limits have no effect on idiosyncratic volatility. We argue that regulators should substitute volatility-interruption systems in place of price-limit systems for individual stocks.

Contrarian strategies and investor overreaction under price limits

This study investigates the effects of price limits on investment performance of contrarian trading strategies in Taiwan’s stock market over the period 1997 to 2006. All contrarian strategies in intraday limit-hit stocks lead to superior returns relative to the benchmark index return, and the findings support the overreaction effect. Also, there is evidence of delayed overreaction reflected by price continuations for the overnight period and price reversals for the subsequent trading day. Moreover, investment performance of contrarian strategies is related to firm characteristics where investors tend to overreact more in small-size, high-turnover, and non-high-tech stocks. Finally, price overreaction is strong for up-hit stocks in the aftermath of catastrophic events. If overreaction exists, price-limit regulation designed to cool off investors and reduce price volatility may not be effective.

Effects of Price Limits on Informed Trading Strategies and Market Performances

This paper investigates the effect of price limits on strategically informed trading and market performances. We show that a price limit will increase the costs of liquidity traders and volatility spillover by its ex ante effects on strategically informed trading. Our study differs from prior research by focusing on informed traders' strategies and information competitiveness. With long-lived information or less information competitiveness, the price limit rule encourages stealthily informed trading, distorts the price dynamics and increases the trading costs of small liquidity traders. Volatility subsequent to a limit-hit is also increased. By using the listed firms in the Taiwan Stock Exchange, we provide empirical evidences that informed traders switch to trade with small orders when they encounter a price limit and volatility spillover exists. Furthermore, this negative effect is more sever for those stocks with less information competitiveness. Our findings suggest that the ex ante effects of price limits on market performances may be contrary to what the stabilizing mechanism is intended to achieve, especially for those firms with less information competitiveness

Price Limit and Volatility in Taiwan Stock Exchange: Some Additional Evidence from the Extreme Value Approach

We reexamine the effects of price limits on stock volatility of Taiwan Stock Exchange using a new methodology based on the Extreme-Value technique. Consistent with the advocates of price limits, we find that stock market volatility is sharply moderated under more restrictive price limits.

ARE PRICE LIMITS EFFECTIVE? EVIDENCE FROM THE ISTANBUL STOCK EXCHANGE

AbstractThere is considerable discussion about controlling volatility by imposing price limits on asset prices. We examine the effects of price limits on a stock market by testing the volatility spillover, delayed price discovery, and trading interference hypotheses in a leading emerging market, the Istanbul Stock Exchange, which has a unique market microstructure as related to price limits. Our results support the volatility spillover, delayed price discovery, and trading interference hypotheses. We also show price locks at limits provide significantly stronger evidence regarding the effects of price limits than limit moves only. Finally, price limits have a significant effect on the stock market, casting doubt on their effectiveness.

Price Limits: How Effective? Evidence from the Istanbul Stock Exchange

There has been considerable discussion in policy circles about controlling volatility by imposing price limits on asset prices. This study examines the effects of price limits on a stock market by testing volatility spillover, delayed price discovery, and trading interference hypotheses in a leading emerging market, Istanbul Stock Exchange (ISE), which has a unique microstructure with related to price limits. Our results support volatility spillover, delayed price discovery, and trading interference hypotheses. We also show price locks at limits measured by Volume-Weighted Average Prices provide significantly stronger evidence regarding the effects of price limits than measurement of limit moves only. Finally, price limits have a significant impact on stock market, casting doubt on their effectiveness in financial markets.

Effects of Price Limits on Volatility: Evidence from the Istanbul Stock Exchange

There has been much discussion among the regulators, investors and academics in policy circles to control the increasing volatility by using the price limits on financial markets. In spite of the strong existence of price limits worldwide, there is no much information regarding the effects of price limits on volatility and price discovery. Most of the previous studies find no evidence for the price limits that reduce the volatility. This study examines the effects of price limits on volatility in stock returns through testing the overreaction and information hypotheses by using the same methodology in Phylaktis et al. (1999) for Athens Stock Exchange in one of the leading emerging markets - Istanbul Stock Exchange (ISE) in the period between years 1990 and 2001 for a larger sample. More specifically, we investigate the effects of increase in price limits on volatility in ISE in the period following the structural change in July 14, 1994 since daily cumulative price limit is doubled as a result of transition from one to two sessions in a trading day by using the econometric techniques such as serial correlation and GARCH models. Our results do not support the information hypothesis in contrast to findings of Phylaktis et al. (1999). Serial correlation analysis gives us no strong evidence to reject or confirm the information hypothesis and inconclusive. Therefore, this inconclusive result motivates us to further analysis in future. GARCH estimation on daily and monthly stock returns controlling for structural breaks, financial and economic crises, trading activity and macroeconomic factors point out in a direction that volatility on stock returns has reduced despite the increase in daily price limits in the period following the structural change in ISE on 14 July, 1994. The majority of stock exhibit a negative and significant sign for the coefficient on the dummy variable. The results are robust to data frequency, leverage effect, financial crises and macroeconomic indicators. In other words, with double sessions and despite broader implicit daily price limit ranges, volatility seems to decline. Findings imply that transition from one to two sessions in a trading day with lunch-break makes positive impact in reducing the volatility in a environment where the price limit is almost doubled. It seems that the two hour lunch-break between the daily sessions has the effect of a circuit breaker, thus facilitating the dissemination of information and preventing severe overreaction to news events which is consistent to overreaction hypothesis. Finally, we find that volatility has decreased after the increase in price limits both for cross-section of stocks and overall index as well in ISE and thus price limits have no impact on volatility in stock market by the positive contribution of trading halt in the middle of the trading day.

Price Limits and Stock Market Volatility in the Athens Stock Exchange

In this paper, we have examined the effects of price limits on the stock volatility in the Athens Stock Exchange. We put forward two hypotheses, the information hypothesis, which implies that price limits only slow down the process of adjustment and have no effect on stock volatility; and the over‐reaction hypothesis, which assumes that investors tend to overreact to new information, so that price limits give them time to reassess the information and reduce stock volatility. Our results show strong support for the information hypothesis. This evidence is obtained by performing the tests on ten stocks, which include heavily traded stocks as well as less active stocks, and covering a variety of industries, and on a market wide price index. The results are also robust to the frequency of the measurement of the returns, and to the tightness of the limits.

Price Limits, Information Acquisition, and Bid–ask Spreads: Theory and Evidence

A number of futures markets use price limits which, in effect, preclude trade from occurring at prices outside certain exogenous bounds. Noting that such markets are characterized by heterogeneously informed traders, whereas previous work on price limits assumes symmetrically informed traders, we examine the effects of price limits in a setting where market participants are asymmetrically informed. We find that imposing price limits generally lowers the quality of information acquired in equilibrium, but lowers bid–ask spreads as well. Thus, depending on the relative weights placed by society on liquidity versus price efficiency, there may exist a set of price limits that are most efficient in achieving a trade‐off between liquidity and informational efficiency. We perform empirical tests of some implications of the model using cross‐sectional data on price limits. We find that price limits are strongly negatively related to both price volatility and trading volume. Though other explanations for our empirical findings cannot be ruled out, these results are not inconsistent with the model's implication that price limits should be tighter for contracts which offer greater profit potential for informed traders.

Price limits and stock market volatility in Taiwan

There is no theoretical basis for determining whether the imposition of circuit breakers will have the desired effect of reducing stock market volatility. A commonly cited benefit ascribed to price limits is that such measures provide a cooling-off period, allowing investors to re-evaluate market information and to reformulate a new investment strategy. Another benefit is that price limits allow order imbalances to be publicized and that therefore they work to attract value traders. In both these ways, proponents claim, price limits protect the market from violent movements. Opponents of price limits argue that they serve no purpose other than to slow down or delay a price change. They argue that even though price limits can stop the price of a share from free falling on the trading day when a shock hits, the price will continue to move toward equilibrium as new limits are established in subsequent trading periods. According to this view, price limits only prolong the number of trading days it will take for the market to adapt to a disturbance toward equilibrium. Given the above diverse viewpoints, the effects of price limits is an issue to be empirically tested. Employing a projected standard deviation series with heteroscedasticity corrected as a measurement for stock volatility, and using both daily and monthly data, we test the hypothesis that a narrower price limit will curtail price fluctuation. Our results do not show that price limits have a significant impact on reducing equity price volatility. On the contrary, we find that price limits tend to slightly exacerbate price volatility. We also find that serial correlations of stock returns are inversely related to the range of price limits, implying a delaying effect of price limits.