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Are price limits really bad for equity markets?

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

    Despite widely documented criticisms, price-limit rules are present in many equity markets around the world. Using a game-theoretic model, we argue that, if the cost of monitoring a market is high, price-limit rules are beneficial. Empirical tests based on a cross section of 43 equity markets across five continents support our theoretical prediction. We find that the probability of the existence of price-limit rules is greater in markets that incur higher monitoring costs due to poorer business disclosure, more corruption and less efficiency in legal, regulatory and technological environments.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 34 (2010)
    Issue (Month): 10 (October)
    Pages: 2462-2471

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    Handle: RePEc:eee:jbfina:v:34:y:2010:i:10:p:2462-2471

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    Related research

    Keywords: Price limit Market manipulation Market monitoring costs;

    References

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    Cited by:
    1. Deb, Saikat Sovan & Kalev, Petko S. & Marisetty, Vijaya B., 2013. "Flexible price limits: The case of Tokyo Stock Exchange," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 24(C), pages 66-84.
    2. Tsai, Kuo-Ting & Lih, Jiann-Shing & Ko, Jing-Yuan, 2012. "The overnight effect on the Taiwan stock market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(24), pages 6497-6505.
    3. 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.

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