Charateristics of Stocks That Frequentley Hit Price Limits Empirical Evidence from Japan

This paper examines the characteristics of stocks that hit the limits listed in the Tokyo Stock Exchange. Most of studies on price limit hits are carried out on stock markets that apply tight price limits rules such as the Taiwan Stock Exchange, the Stock Exchange of Thailand and Korea Stock Exchange. A market that applies tighter price limit rules experiences many limit-hit occurrences; this makes analysis simpler because the analysis can use a smaller number of stocks and a reasonable sample period. Therefore, this study contributes to the literature by examining the Tokyo Stock Exchange, which applies wide price limit rules. We analyzed the characteristics of stocks that hit the limits more frequently, stocks that hit the upper limits and stocks that hit the lower limits. Daily data were collected for all stocks listed in the Tokyo Stock Exchange from 2003 to 2007. The data were downloaded from the Datastream and the Tokyo Stock Exchange website. Three binary logistic regression models were applied. The first model tested the characteristics of stocks that hit upper and lower limits more frequently. The second model was for the characteristics of stocks that hit the upper limits, and the final model was for the characteristics of stocks that hit the lower limits. The results show that stocks that hit the upper limits tend to have a smaller systematic risk, while stocks that hit the lower limit tend to have a high systematic risk. This indicates that lower limit hits are due mostly to market-driven downward movements while upper limit hits are more likely related to company-driven upward movements. This means that price limits rules were effective in Japan in curbing undesired fluctuations of stock prices and in protecting the market from crashes. The results of the three models show that both upper and lower limit hits and upper and lower limit hits individually vary from year to year throughout the sample period. In general, high market value stocks, high volatility stocks, high residual risk stocks and low systematic risk stocks tend to hit the limits more frequently. The results also show that high market value stocks, high volatility stocks, high residual risk stocks, low liquidity stocks and low systematic risk stocks tend to hit the upper limits. Meanwhile, high market value stocks, high volatility stocks, high residual risk stocks, low liquidity stocks and high systematic risk stocks tend to hit the lower limits. Our study can be viewed as providing complementary evidence. By documenting some regularity with which price limit hit events occur, we offer new considerations to the current discussions surrounding price limit mechanisms. In spite of the negative effects shown by scholarly researchers, the popularity of price limits among both practitioners and stock exchange officials may be partially justified through our empirical evidence.