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Are price limits really bad for equity markets?

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  • Deb, Saikat Sovan
  • Kalev, Petko S.
  • Marisetty, Vijaya B.

Abstract

Despite widely documented criticisms, price-limit rules are present in many equity markets around the world. Using a game-theoretic model, we argue that, if the cost of monitoring a market is high, price-limit rules are beneficial. Empirical tests based on a cross section of 43 equity markets across five continents support our theoretical prediction. We find that the probability of the existence of price-limit rules is greater in markets that incur higher monitoring costs due to poorer business disclosure, more corruption and less efficiency in legal, regulatory and technological environments.

Suggested Citation

  • Deb, Saikat Sovan & Kalev, Petko S. & Marisetty, Vijaya B., 2010. "Are price limits really bad for equity markets?," Journal of Banking & Finance, Elsevier, vol. 34(10), pages 2462-2471, October.
  • Handle: RePEc:eee:jbfina:v:34:y:2010:i:10:p:2462-2471
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Mei-Hua Liao & Chien-Chih Lin & Yinrou Wang, 2011. "The Effects of Removing Price Limits: Evidence from Taiwan IPO Stocks," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 47(0), pages 40-52, November.
    2. Mei-Hua Liao & Chien-Chih Lin & Yinrou Wang, 2011. "The Effects of Removing Price Limits: Evidence from Taiwan IPO Stocks," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 47(0), pages 40-52, November.
    3. Tsai, Kuo-Ting & Lih, Jiann-Shing & Ko, Jing-Yuan, 2012. "The overnight effect on the Taiwan stock market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(24), pages 6497-6505.
    4. Eymen Errais & Dhikra Bahri, 2016. "Is Standard Deviation a Good Measure of Volatility? the Case of African Markets with Price Limits," Annals of Economics and Finance, Society for AEF, vol. 17(1), pages 145-165, May.
    5. James Brugler & Oliver Linton, 2014. "Circuit Breakers on the London Stock Exchange: Do they improve subsequent market quality?," Cambridge Working Papers in Economics 1453, Faculty of Economics, University of Cambridge.
    6. repec:eee:pacfin:v:45:y:2017:i:c:p:142-156 is not listed on IDEAS
    7. James Brugler & Oliver Linton, 2014. "Single stock circuit breakers on the London Stock Exchange: do they improve subsequent market quality?," CeMMAP working papers CWP07/14, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
    8. repec:spr:annopr:v:260:y:2018:i:1:d:10.1007_s10479-016-2317-y is not listed on IDEAS
    9. Deb, Saikat Sovan & Kalev, Petko S. & Marisetty, Vijaya B., 2013. "Flexible price limits: The case of Tokyo Stock Exchange," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 24(C), pages 66-84.
    10. Wonse Kim & Sungjae Jun, 2018. "Effects of a Price limit Change on Market Stability at the Intraday Horizon in the Korean Stock Market," Papers 1805.04728, arXiv.org.

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