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Tail risk under price limits

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  • Oh, Sekyung
  • Kee, Hyukdo
  • Park, Kinam

Abstract

This study investigates tail risk dynamics when price limits exist in stock markets, which have not been examined in the previous literature. We present the expected value of tail risk under price limits and then analyze the extent to which such limits affect Korean stock markets when they are eased gradually. The main results are threefold. First, tail risk is seriously underestimated in stock markets with a price limit system. Second, tail risk is a significant risk factor in determining asset prices if price limits are above a certain level (15%). Lastly, related to the Korean economy, tail risk has predictive power to the future stock returns when the price limit is more than 15%. In particular, tail risk has no predictive power until price limits are relaxed to 15%, implying that caution is needed when the effects of tail risk are analyzed in countries where price limits exist.

Suggested Citation

  • Oh, Sekyung & Kee, Hyukdo & Park, Kinam, 2019. "Tail risk under price limits," Economic Modelling, Elsevier, vol. 77(C), pages 113-123.
    • Handle: RePEc:eee:ecmode:v:77:y:2019:i:c:p:113-123
    DOI: 10.1016/j.econmod.2018.12.002
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    More about this item

    Keywords

    Tail risk; Price limit; Systemic risk; Risk price;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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