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Why Do Price Limits Exist in Stock Markets? A Manipulation†Based Explanation

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  • Kenneth A. Kim
  • Jungsoo Park

Abstract

Numerous stock market regulators around the world impose daily price limits on individual stock price movements. We derive a simple model that shows that price limits may deter stock market manipulators. Based on our model's implications, we predict that regulators impose price limit rules for markets where the likelihood of manipulation is high. We present empirical evidence consistent with this hypothesis. Our study is the first to formally propose a manipulation†based rationale for the existence of price limits in stock markets.

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  • Kenneth A. Kim & Jungsoo Park, 2010. "Why Do Price Limits Exist in Stock Markets? A Manipulation†Based Explanation," European Financial Management, European Financial Management Association, vol. 16(2), pages 296-318, March.
    • Handle: RePEc:bla:eufman:v:16:y:2010:i:2:p:296-318
    DOI: 10.1111/j.1468-036X.2008.00456.x
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