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Estimating the effect of price limits on limit-hitting days

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  • Jeff Chung
  • Li Gan

Abstract

This study examines whether price limits affect underlying equilibrium prices on limit-hitting days. To identify two effects--a ceiling effect and a cooling or heating effect (C--H effect)--we use the fact that equilibrium prices are reached at the day immediately after price limits are hit. We estimate the C--H effect by letting the return series be mixture normal to capture the possible "fat tails." We apply our models to five randomly selected Taiwanese stocks and all the continuously traded stocks in our sample period. The simple normal density which would lead one to conclude that price limits can "cool off" stock prices is soundly rejected. However, if normal mixture density is used, one would generally conclude that price limits will have no effect on the variance of stock returns. Copyright 2005 Royal Economic Society

Suggested Citation

  • Jeff Chung & Li Gan, 2005. "Estimating the effect of price limits on limit-hitting days," Econometrics Journal, Royal Economic Society, vol. 8(1), pages 79-96, March.
  • Handle: RePEc:ect:emjrnl:v:8:y:2005:i:1:p:79-96
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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1368-423X.2005.00153.x
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    Cited by:

    1. Halim DABBOU & Ahmed SILEM, 2014. "Price Limit and Financial Contagion: Protection or Illusion? The Tunisian Stock Exchange Case," International Journal of Economics and Financial Issues, Econjournals, vol. 4(1), pages 54-70.
    2. 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.
    3. Hsieh, Ping-Hung & Yang, J. Jimmy, 2009. "A censored stochastic volatility approach to the estimation of price limit moves," Journal of Empirical Finance, Elsevier, vol. 16(2), pages 337-351, March.
    4. Lin, Chaonan & Ko, Kuan-Cheng & Lin, Lin & Yang, Nien-Tzu, 2017. "Price limits and the value premium in the Taiwan stock market," Pacific-Basin Finance Journal, Elsevier, vol. 41(C), pages 26-45.
    5. Farag, Hisham, 2015. "The influence of price limits on overreaction in emerging markets: Evidence from the Egyptian stock market," The Quarterly Review of Economics and Finance, Elsevier, vol. 58(C), pages 190-199.

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