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Flexible price limits: The case of Tokyo Stock Exchange

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  • Deb, Saikat Sovan
  • Kalev, Petko S.
  • Marisetty, Vijaya B.
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    Abstract

    Daily price limits are criticized for their role in disrupting price adjustment process. We propose a flexible price limits mechanism as an alternative to daily price limit rules. First, we identify volatility spill-over and consecutive price limit hits as the source for disrupting informed trading. Later, we propose flexible price limits that can be implemented by using predicted probability of volatility spill-over and consecutive price limit hits. We provide empirical evidence in support of flexible price limits’ efficiency by using 5 years intra-day data of stocks listed on the Tokyo Stock Exchange.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of International Financial Markets, Institutions and Money.

    Volume (Year): 24 (2013)
    Issue (Month): C ()
    Pages: 66-84

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    Handle: RePEc:eee:intfin:v:24:y:2013:i:c:p:66-84

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    Web page: http://www.elsevier.com/locate/intfin

    Related research

    Keywords: Daily price limits; Volatility spill-over; Consecutive price limit hit;

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    References

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    1. Barclay, Michael J. & Warner, Jerold B., 1993. "Stealth trading and volatility : Which trades move prices?," Journal of Financial Economics, Elsevier, Elsevier, vol. 34(3), pages 281-305, December.
    2. Lubos Pastor & Pietro Veronesi, 2002. "Stock Valuation and Learning about Profitability," NBER Working Papers 8991, National Bureau of Economic Research, Inc.
    3. Lehmann, B.N., 1989. "Commentary: Volatility, Price Resolution, And The Effectiveness Of Price Limits," Papers, Columbia - Center for Futures Markets t9, Columbia - Center for Futures Markets.
    4. 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(02), pages 313-327, June.
    5. Deb, Saikat Sovan & Kalev, Petko S. & Marisetty, Vijaya B., 2010. "Are price limits really bad for equity markets?," Journal of Banking & Finance, Elsevier, vol. 34(10), pages 2462-2471, October.
    6. Kang, Moonsoo, 2010. "Probability of information-based trading and the January effect," Journal of Banking & Finance, Elsevier, vol. 34(12), pages 2985-2994, December.
    7. Chakravarty, Sugato, 2001. "Stealth-trading: Which traders' trades move stock prices?," Journal of Financial Economics, Elsevier, Elsevier, vol. 61(2), pages 289-307, August.
    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.
    9. Anat R. Admati, Paul Pfleiderer, 1988. "A Theory of Intraday Patterns: Volume and Price Variability," Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 3-40.
    10. Lee, Charles M C & Ready, Mark J, 1991. " Inferring Trade Direction from Intraday Data," Journal of Finance, American Finance Association, vol. 46(2), pages 733-46, June.
    11. 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 885-99, June.
    12. Miller, M.H., 1989. "Commentary: Volatility, Prices Resolution, And Effectiveness Of Price Limits," Papers, Columbia - Center for Futures Markets t8, Columbia - Center for Futures Markets.
    13. Recep Bildik & Selim Elekdag, 2004. "Effects of Price Limits on Volatility: Evidence from the Istanbul Stock Exchange," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., M.E. Sharpe, Inc., vol. 40(1), pages 5-34, January.
    14. Anand, Amber & Chakravarty, Sugato, 2007. "Stealth Trading in Options Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 42(01), pages 167-187, March.
    15. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, Econometric Society, vol. 53(6), pages 1315-35, November.
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    Cited by:
    1. Li, Huimin & Zheng, Dazhi & Chen, Jun, 2014. "Effectiveness, cause and impact of price limit—Evidence from China's cross-listed stocks," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 29(C), pages 217-241.

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