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The effect of price limits on intraday volatility and information asymmetry

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  • Kim, Yong H.
  • Yang, J. Jimmy
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    Abstract

    We investigate the effect of price limits on intra-day volatility and information asymmetry using transactions data from the Taiwan Stock Exchange. Proponents of price limits argue that they provide an opportunity for investors to reevaluate market information and make more rational trading decisions. We identify three different limit hits - closing, single, and consecutive - and hypothesize that only the consecutive limit hits are likely to provide such an opportunity, namely, to counter investor overreaction (volatility hypothesis) and to enhance information revelation (information asymmetry hypothesis). Our empirical evidence supports the volatility hypothesis. Our findings generate important policy implications for stock markets that have price limits.

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    Bibliographic Info

    Article provided by Elsevier in its journal Pacific-Basin Finance Journal.

    Volume (Year): 16 (2008)
    Issue (Month): 5 (November)
    Pages: 522-538

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    Handle: RePEc:eee:pacfin:v:16:y:2008:i:5:p:522-538

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

    Related research

    Keywords: Price limits Overreaction Volatility Information asymmetry Transactions data;

    References

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    Cited by:
    1. 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.
    2. 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, vol. 29(C), pages 217-241.

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