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What affects the cool-off duration under price limits?

Author

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

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.

Suggested Citation

  • Chou, Pin-Huang & Chou, Robin K. & Ko, Kuan-Cheng & Chao, Chun-Yi, 2013. "What affects the cool-off duration under price limits?," Pacific-Basin Finance Journal, Elsevier, vol. 24(C), pages 256-278.
    • Handle: RePEc:eee:pacfin:v:24:y:2013:i:c:p:256-278
    DOI: 10.1016/j.pacfin.2013.01.004
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    References listed on IDEAS

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    Cited by:

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    2. Lin, Chaonan & Ko, Kuan-Cheng & Lu, Chien-Lin, 2023. "Why is the Amihud (2002) measure priced in Taiwan: Illiquidity or mispricing?," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    3. Lin, Chaonan & Ko, Kuan-Cheng & Chen, Yu-Lin & Chu, Hsiang-Hui, 2016. "Information discreteness, price limits and earnings momentum," Pacific-Basin Finance Journal, Elsevier, vol. 37(C), pages 1-22.
    4. Imtiaz Mohammad Sifat & Azhar Mohamad, 2019. "Circuit breakers as market stability levers: A survey of research, praxis, and challenges," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 24(3), pages 1130-1169, July.
    5. 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.
    6. Clapham, Benjamin & Gomber, Peter & Haferkorn, Martin & Panz, Sven, 2017. "Managing excess volatility: Design and effectiveness of circuit breakers," SAFE Working Paper Series 195, Leibniz Institute for Financial Research SAFE.
    7. Chen-Yu Chen & Jian-Hsin Chou & Hung-Gay Fung & Yiuman Tse, 2017. "Setting the futures margin with price limits: the case for single-stock futures," Review of Quantitative Finance and Accounting, Springer, vol. 48(1), pages 219-237, January.
    8. Ho, Hsiao-Wei & Hsiao, Yu-Jen & Lo, Wen-Chi & Yang, Nien-Tzu, 2023. "Momentum investing and a tale of intraday and overnight returns: Evidence from Taiwan," Pacific-Basin Finance Journal, Elsevier, vol. 82(C).
    9. Lin, Chaonan & Ho, Hsiao-Wei & Ko, Kuan-Cheng, 2023. "Shorting flows and return predictability in Taiwan," Pacific-Basin Finance Journal, Elsevier, vol. 77(C).
    10. Tang, Siyuan, 2023. "Price limit performance: New evidence from a quasi-natural experiment in China's ChiNext market," International Review of Financial Analysis, Elsevier, vol. 89(C).
    11. Donald Lien & Pi-Hsia Hung & Chiu-Ting Pan, 2020. "Price limit changes, order decisions, and stock price movements: an empirical analysis of the Taiwan Stock Exchange," Review of Quantitative Finance and Accounting, Springer, vol. 55(1), pages 239-268, July.
    12. Millicent Chang & Andrew B. Jackson & Marvin Wee, 2018. "A review of research on regulation changes in the Asia‐Pacific region," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 58(3), pages 635-667, September.

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    More about this item

    Keywords

    Price limits; Limit-hit duration; Magnet effect; Censoring;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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