IDEAS home Printed from https://ideas.repec.org/a/eee/glofin/v24y2013i1p85-97.html
   My bibliography  Save this article

Price limit bands, asymmetric volatility and stock market anomalies: Evidence from emerging markets

Author

Listed:
  • Farag, Hisham

Abstract

I investigate the effects of imposing different bands of price limits on stock returns and volatility in the Egyptian (EGX), Thai (SET) and Korean (KRX) stock exchanges. In addition, the paper examines whether the switch from narrow price limits (NPL) to wider price limits (WPL) structurally alters volatility and the day of the week anomaly. Using the extended EGARCH and PARCH asymmetric volatility models, I found that the switch from NPL to WPL structurally altered both asymmetric volatility and the day of the week anomaly in the EGX, SET and KRX. I argue that the price discovery mechanism is disrupted due to the switch as closing prices do not fully reflect all information arrived in the market when prices hit the limits and that is reflected on volatility and market efficiency.

Suggested Citation

  • Farag, Hisham, 2013. "Price limit bands, asymmetric volatility and stock market anomalies: Evidence from emerging markets," Global Finance Journal, Elsevier, vol. 24(1), pages 85-97.
  • Handle: RePEc:eee:glofin:v:24:y:2013:i:1:p:85-97
    DOI: 10.1016/j.gfj.2013.03.002
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1044028313000033
    Download Restriction: Full text for ScienceDirect subscribers only

    File URL: https://libkey.io/10.1016/j.gfj.2013.03.002?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Lee, Charles M C & Ready, Mark J & Seguin, Paul J, 1994. "Volume, Volatility, and New York Stock Exchange Trading Halts," Journal of Finance, American Finance Association, vol. 49(1), pages 183-214, March.
    2. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-370, March.
    3. Bent Jesper Christensen & Morten Ørregaard Nielsen, 2007. "The Effect of Long Memory in Volatility on Stock Market Fluctuations," The Review of Economics and Statistics, MIT Press, vol. 89(4), pages 684-700, November.
    4. Kim, Yong H. & Yagüe, José & Yang, J. Jimmy, 2008. "Relative performance of trading halts and price limits: Evidence from the Spanish Stock Exchange," International Review of Economics & Finance, Elsevier, vol. 17(2), pages 197-215.
    5. Ding, Zhuanxin & Granger, Clive W. J. & Engle, Robert F., 1993. "A long memory property of stock market returns and a new model," Journal of Empirical Finance, Elsevier, vol. 1(1), pages 83-106, June.
    6. Taufiq Choudhry, 2000. "Day of the week effect in emerging Asian stock markets: evidence from the GARCH model," Applied Financial Economics, Taylor & Francis Journals, vol. 10(3), pages 235-242.
    7. Dimitar Tonchev & Tae-Hwan Kim, 2004. "Calendar effects in Eastern European financial markets: evidence from the Czech Republic, Slovakia and Slovenia," Applied Financial Economics, Taylor & Francis Journals, vol. 14(14), pages 1035-1043.
    8. Kate Phylaktis & Manolis Kavussanos & Gikas Manalis, 1999. "Price Limits and Stock Market Volatility in the Athens Stock Exchange," European Financial Management, European Financial Management Association, vol. 5(1), pages 69-84, March.
    9. Huang, Yen-Sheng & Fu, Tze-Wei & Ke, Mei-Chu, 2001. "Daily price limits and stock price behavior: evidence from the Taiwan stock exchange," International Review of Economics & Finance, Elsevier, vol. 10(3), pages 263-288, July.
    10. Recep Bildik & Güzhan Gülay, 2006. "Are Price Limits Effective? Evidence From The Istanbul Stock Exchange," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 29(3), pages 383-403, September.
    11. G. J. Santoni & Tung Liu, 1993. "Circuit breakers and stock market volatility," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 13(3), pages 261-277, May.
    12. Wilson Tong, 2000. "International Evidence On Weekend Anomalies," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 23(4), pages 495-522, December.
    13. Charles, Amélie, 2010. "The day-of-the-week effects on the volatility: The role of the asymmetry," European Journal of Operational Research, Elsevier, vol. 202(1), pages 143-152, April.
    14. Kim, Kenneth & Rhee, S Ghon, 1997. "Price Limit Performance: Evidence from the Tokyo Stock Exchange," Journal of Finance, American Finance Association, vol. 52(2), pages 885-899, June.
    15. Schwert, G William, 1990. "Stock Volatility and the Crash of '87," Review of Financial Studies, Society for Financial Studies, vol. 3(1), pages 77-102.
    16. H. Kent Baker & Abdul Rahman & Samir Saadi, 2008. "The day‐of‐the‐week effect and conditional volatility: Sensitivity of error distributional assumptions," Review of Financial Economics, John Wiley & Sons, vol. 17(4), pages 280-295, December.
    17. Smirlock, Michael & Starks, Laura, 1986. "Day-of-the-week and intraday effects in stock returns," Journal of Financial Economics, Elsevier, vol. 17(1), pages 197-210, September.
    18. Ercan Balaban, 1995. "Day of the week effects: new evidence from an emerging stock market," Applied Economics Letters, Taylor & Francis Journals, vol. 2(5), pages 139-143.
    19. Jeffrey Jaffe & R. Westerfield, "undated". "The Week-End Effect in Common Stock Returns: The International Evidence," Rodney L. White Center for Financial Research Working Papers 3-85, Wharton School Rodney L. White Center for Financial Research.
    20. Jaffe, Jeffrey F & Westerfield, Randolph, 1985. "The Week-End Effect in Common Stock Returns: The International Evidence," Journal of Finance, American Finance Association, vol. 40(2), pages 433-454, June.
    21. Rogalski, Richard J, 1984. "New Findings Regarding Day-of-the-Week Returns over Trading and Non-trading Periods: A Note," Journal of Finance, American Finance Association, vol. 39(5), pages 1603-1614, December.
    22. Engle, Robert F & Ng, Victor K, 1993. "Measuring and Testing the Impact of News on Volatility," Journal of Finance, American Finance Association, vol. 48(5), pages 1749-1778, December.
    23. Shane A. Corwin & Marc L. Lipson, 2000. "Order Flow and Liquidity around NYSE Trading Halts," Journal of Finance, American Finance Association, vol. 55(4), pages 1771-1805, August.
    24. Hakan Berument & Halil Kiymaz, 2001. "The day of the week effect on stock market volatility," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 25(2), pages 181-193, June.
    25. Mahendra Chandra, 2006. "The day-of-the-week effect in conditional correlation," Review of Quantitative Finance and Accounting, Springer, vol. 27(3), pages 297-310, November.
    26. George, Thomas J. & Hwang, Chuan-Yang, 1995. "Transitory Price Changes and Price-Limit Rules: Evidence from the Tokyo Stock Exchange," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(2), pages 313-327, June.
    27. Higgins, Matthew L & Bera, Anil K, 1992. "A Class of Nonlinear ARCH Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(1), pages 137-158, February.
    28. Subrahmanyam, Avanidhar, 1994. "Circuit Breakers and Market Volatility: A Theoretical Perspective," Journal of Finance, American Finance Association, vol. 49(1), pages 237-254, March.
    29. Jeffrey Jaffe & R. Westerfield, "undated". "The Week-End Effect in Common Stock Returns: The International Evidence," Rodney L. White Center for Financial Research Working Papers 03-85, Wharton School Rodney L. White Center for Financial Research.
    30. William G. Christie & Shane A. Corwin & Jeffrey H. Harris, 2002. "Nasdaq Trading Halts: The Impact of Market Mechanisms on Prices, Trading Activity, and Execution Costs," Journal of Finance, American Finance Association, vol. 57(3), pages 1443-1478, June.
    31. Hisham Farag & Robert Cressy, 2012. "Stock market regulation and news dissemination: evidence from an emerging market," The European Journal of Finance, Taylor & Francis Journals, vol. 18(3-4), pages 351-368, April.
    32. Purnendu Nath, 2005. "Are Price Limits Always Bad?," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 4(3), pages 281-313, December.
    33. Berkman, Henk & Lee, John Byong Tek, 2002. "The effectiveness of price limits in an emerging market: Evidence from the Korean Stock Exchange," Pacific-Basin Finance Journal, Elsevier, vol. 10(5), pages 517-530, November.
    34. Lauterbach, Beni & Ben-Zion, Uri, 1993. "Stock Market Crashes and the Performance of Circuit Breakers: Empirical Evidence," Journal of Finance, American Finance Association, vol. 48(5), pages 1909-1925, December.
    35. Jeff Chung & Li Gan, 2005. "Estimating the effect of price limits on limit-hitting days," Econometrics Journal, Royal Economic Society, vol. 8(1), pages 79-96, March.
    36. Solnik, Bruno & Bousquet, Laurence, 1990. "Day-of-the-week effect on the Paris Bourse," Journal of Banking & Finance, Elsevier, vol. 14(2-3), pages 461-468, August.
    37. G. Kohers & N. Kohers & V. Pandey & T. Kohers, 2004. "The disappearing day-of-the-week effect in the world's largest equity markets," Applied Economics Letters, Taylor & Francis Journals, vol. 11(3), pages 167-171.
    38. Zainudin Arsad & J. Andrew Coutts, 1997. "Security price anomalies in the London International Stock Exchange: a 60 year perspective," Applied Financial Economics, Taylor & Francis Journals, vol. 7(5), pages 455-464.
    39. Paul C. Tetlock, 2007. "Giving Content to Investor Sentiment: The Role of Media in the Stock Market," Journal of Finance, American Finance Association, vol. 62(3), pages 1139-1168, June.
    40. M. Berument & Nukhet Dogan, 2012. "Stock market return and volatility: day-of-the-week effect," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 36(2), pages 282-302, April.
    41. Gong-meng Chen & Oliver Rui & Steven Wang, 2005. "The Effectiveness of Price Limits and Stock Characteristics: Evidence from the Shanghai and Shenzhen Stock Exchanges," Review of Quantitative Finance and Accounting, Springer, vol. 25(2), pages 159-182, September.
    42. Kiymaz, Halil & Berument, Hakan, 2003. "The day of the week effect on stock market volatility and volume: International evidence," Review of Financial Economics, Elsevier, vol. 12(4), pages 363-380.
    43. Kim, Yong H. & Yang, J. Jimmy, 2008. "The effect of price limits on intraday volatility and information asymmetry," Pacific-Basin Finance Journal, Elsevier, vol. 16(5), pages 522-538, November.
    44. Gibbons, Michael R & Hess, Patrick, 1981. "Day of the Week Effects and Asset Returns," The Journal of Business, University of Chicago Press, vol. 54(4), pages 579-596, October.
    45. Lehmann, B.N., 1989. "Commentary: Volatility, Price Resolution, And The Effectiveness Of Price Limits," Papers t9, Columbia - Center for Futures Markets.
    46. Hyun-Jung Ryoo & Graham Smith, 2002. "Korean stock prices under price limits: variance ratio tests of random walks," Applied Financial Economics, Taylor & Francis Journals, vol. 12(8), pages 545-553.
    47. Shane A. Corwin & Marc L. Lipson, 2000. "Order Flow and Liquidity around NYSE Trading Halts," Journal of Finance, American Finance Association, vol. 55(4), pages 1771-1801, August.
    48. Aggarwal, Reena & Rivoli, Pietra, 1989. "Seasonal and Day-of-the-Week Effects in Four Emerging Stock Markets," The Financial Review, Eastern Finance Association, vol. 24(4), pages 541-550, November.
    49. Cemal Berk Oğuzsoy & Sibel Güven, 2006. "Turn of the Month and Turn of the Month Surrounding Days Effects in Istanbul Stock Exchange," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 5(1), pages 1-13, April.
    50. Chan, Soon Huat & Kim, Kenneth A. & Rhee, S. Ghon, 2005. "Price limit performance: evidence from transactions data and the limit order book," Journal of Empirical Finance, Elsevier, vol. 12(2), pages 269-290, March.
    51. Roger Edelen & Simon Gervais, 2003. "The Role of Trading Halts in Monitoring a Specialist Market," Review of Financial Studies, Society for Financial Studies, vol. 16(1), pages 263-300.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Manhwa Wu & Paoyu Huang & Yensen Ni, 2020. "The Impact of Institutional Shareholdings on Price Limits," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 27(3), pages 343-361, September.
    2. Deb, Saikat Sovan & Kalev, Petko S & Marisetty, Vijaya B, 2017. "Price limits and volatility," Pacific-Basin Finance Journal, Elsevier, vol. 45(C), pages 142-156.
    3. Chowdhury, Anup & Uddin, Moshfique & Anderson, Keith, 2022. "Trading behaviour and market sentiment: Firm-level evidence from an emerging Islamic market," Global Finance Journal, Elsevier, vol. 53(C).
    4. Imtiaz Mohammad Sifat & Azhar Mohamad, 2019. "Circuit breakers as market stability levers: A survey of research, praxis, and challenges," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 24(3), pages 1130-1169, July.
    5. Hao Li & Zhisheng Li, 2022. "The effect of daily price limits on stock liquidity: Evidence from the Chinese stock market," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(5), pages 4885-4917, December.
    6. Zhang, Xiaotao & Wang, Ziqiao & Hao, Jing & He, Feng, 2022. "Price limit and stock market quality: Evidence from a quasi-natural experiment in the Chinese stock market," Pacific-Basin Finance Journal, Elsevier, vol. 74(C).
    7. Tang, Siyuan, 2023. "Price limit performance: New evidence from a quasi-natural experiment in China's ChiNext market," International Review of Financial Analysis, Elsevier, vol. 89(C).
    8. Seza Danışoğlu & Z. Nuray Güner, 2018. "Do price limits help control stock price volatility?," Annals of Operations Research, Springer, vol. 260(1), pages 129-157, January.
    9. Hisham Farag, 2015. "Long-term Overreaction, Regulatory Policies and Stock Market Anomalies: Evidence from Egypt," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 14(2), pages 112-139, August.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Imtiaz Mohammad Sifat & Azhar Mohamad, 2019. "Circuit breakers as market stability levers: A survey of research, praxis, and challenges," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 24(3), pages 1130-1169, July.
    2. Clapham, Benjamin & Gomber, Peter & Haferkorn, Martin & Panz, Sven, 2017. "Managing excess volatility: Design and effectiveness of circuit breakers," SAFE Working Paper Series 195, Leibniz Institute for Financial Research SAFE.
    3. Farag, Hisham, 2014. "The effectiveness of competing regulatory regimes and the switching effects: Evidence from an emerging market," Global Finance Journal, Elsevier, vol. 25(2), pages 136-147.
    4. James Brugler & Oliver Linton, 2014. "Single stock circuit breakers on the London Stock Exchange: do they improve subsequent market quality?," CeMMAP working papers CWP07/14, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
    5. Chowdhury, Anup & Uddin, Moshfique & Anderson, Keith, 2022. "Trading behaviour and market sentiment: Firm-level evidence from an emerging Islamic market," Global Finance Journal, Elsevier, vol. 53(C).
    6. Farag, Hisham, 2015. "The influence of price limits on overreaction in emerging markets: Evidence from the Egyptian stock market," The Quarterly Review of Economics and Finance, Elsevier, vol. 58(C), pages 190-199.
    7. Dumitriu, Ramona & Stefanescu, Razvan, 2013. "DOW effects in returns and in volatility of stock markets during quiet and turbulent times," MPRA Paper 47218, University Library of Munich, Germany, revised 02 Apr 2013.
    8. Faruk Bostanci & Saim Kilic, 2010. "The Effects of Free Float Ratios on Market Performance: An Empirical Study on the Istanbul Stock Exchange," Istanbul Stock Exchange Review, Research and Business Development Department, Borsa Istanbul, vol. 12(45), pages 1-14.
    9. repec:bor:iserev:v:12:y:2012:i:45:p:27-58 is not listed on IDEAS
    10. H. Kent Baker & Abdul Rahman & Samir Saadi, 2008. "The day‐of‐the‐week effect and conditional volatility: Sensitivity of error distributional assumptions," Review of Financial Economics, John Wiley & Sons, vol. 17(4), pages 280-295, December.
    11. repec:bor:iserev:v:12:y:2012:i:45:p:1-26 is not listed on IDEAS
    12. Mehmet Hasan Eken & Taylan Ozgür Uner, 2010. "Calendar Effects in the Stock Market and a Practice Relatedn to the Istanbul Stock Exchange Market (ISEM)," Istanbul Stock Exchange Review, Research and Business Development Department, Borsa Istanbul, vol. 12(45), pages 59-95.
    13. Roberto Joaquín Santillán Salgado & Alejandro Fonseca Ramírez & Luis Nelson Romero, 2019. "The "day-of-the-week" effects in the exchange rate of Latin American currencies," Remef - Revista Mexicana de Economía y Finanzas Nueva Época REMEF (The Mexican Journal of Economics and Finance), Instituto Mexicano de Ejecutivos de Finanzas, IMEF, vol. 14(PNEA), pages 485-507, Agosto 20.
    14. repec:bor:iserev:v:12:y:2012:i:45:p:59-95 is not listed on IDEAS
    15. James Brugler & Oliver Linton, 2014. "Circuit Breakers on the London Stock Exchange: Do they improve subsequent market quality?," Cambridge Working Papers in Economics 1453, Faculty of Economics, University of Cambridge.
    16. A. R. Zafer Sayar & Onder Kaymaz & Ali Alp, 2010. "The Effect of the Transparency Level of the ISE-Listed Banks on Liquidity," Istanbul Stock Exchange Review, Research and Business Development Department, Borsa Istanbul, vol. 12(45), pages 27-58.
    17. Tang, Siyuan, 2023. "Price limit performance: New evidence from a quasi-natural experiment in China's ChiNext market," International Review of Financial Analysis, Elsevier, vol. 89(C).
    18. Kiymaz, Halil & Berument, Hakan, 2003. "The day of the week effect on stock market volatility and volume: International evidence," Review of Financial Economics, Elsevier, vol. 12(4), pages 363-380.
    19. P., Srinivasan & M., Kalaivani, 2013. "Day-of-the-Week Effects in the Indian stock market," MPRA Paper 46805, University Library of Munich, Germany.
    20. Abdelkader Derbali & Slaheddine Hallara, 2016. "Day-of-the-week effect on the Tunisian stock market return and volatility," Cogent Business & Management, Taylor & Francis Journals, vol. 3(1), pages 1147111-114, December.
    21. Chatzitzisi, Evanthia & Fountas, Stilianos & Panagiotidis, Theodore, 2021. "Another look at calendar anomalies," The Quarterly Review of Economics and Finance, Elsevier, vol. 80(C), pages 823-840.
    22. Georgios Bampinas & Stilianos Fountas & Theodore Panagiotidis, 2015. "The day-of-the-week effect is weak: Evidence from the European Real Estate Sector," Discussion Paper Series 2015_02, Department of Economics, University of Macedonia, revised May 2015.
    23. Julijana Angelovska, 2013. "An Econometric Analysis of Market Anomaly - Day of the Week Effect on a Small Emerging Market," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 3(1), pages 314-322, January.

    More about this item

    Keywords

    Volatility; Day of the week; Price limits;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:glofin:v:24:y:2013:i:1:p:85-97. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/620162 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.