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What affects the cool-off duration under price limits?

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  • Chou, Pin-Huang
  • Chou, Robin K.
  • Ko, Kuan-Cheng
  • Chao, Chun-Yi
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    Abstract

    Price limits supposedly provide a cool-off period that allows investors to reassess the market conditions. They represent an implementation risk, a special form of arbitrage risk, that impedes arbitrageurs from engaging in arbitrage activities to correct for potential mispricing. We conjecture that the cool-off period would be lengthier for stocks that are subject to higher degrees of arbitrage risk and investor sentiment, and that the effect of arbitrage risk is stronger in up-limit hits because of higher short-sale restriction involved. Based on a sample of intraday data from the Taiwan Stock Exchange, we find that stocks with smaller capitalizations and higher idiosyncratic risk tend to have longer limit-hit durations, consistent with the behavioral argument. The empirical results have important policy implications for stock market regulations.

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    Bibliographic Info

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

    Volume (Year): 24 (2013)
    Issue (Month): C ()
    Pages: 256-278

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    Handle: RePEc:eee:pacfin:v:24:y:2013:i:c:p:256-278

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

    Related research

    Keywords: Price limits; Limit-hit duration; Magnet effect; Censoring;

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    References

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