Narrow Price Limit And Stock Price Volatility In Emerging Markets: Empirical Evidence From Amman Stock Exchange

This paper empirically investigates the behaviour of daily stock return volatility around price limit hits for a sample of 159 (189) securities listed in Amman Stock Exchange (ASE), over the years 2003(2004). More specifically, we investigate whether daily return volatility for stocks that hit a price limit is lower (higher) in the post limit hit period than in the pre limit hit period. Such a finding would be consistent with the overreaction hypothesis, also referred to as the volatility spill over hypothesis. Our results indicate that stocks-hit experience their highest level of volatility on the day when stocks-hit reach their upper daily price limits of 5% (day 0), and decreases significantly one day after the hit. Similar results are found when stock hits reach their lower daily price limits of -5%, however with less magnitude. Results on the different sectors reveal that the banking sector experiences the highest volatility. However, when the stocks-hit reach its lower limit, the service sector shows the highest volatility as compared to the other sectors in the industry. Therefore, our results are more consistent with the overreaction hypothesis and that the price-limit technique is effective in reducing the volatility by providing a time-out to cool-off.