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Pricing Securities With Exchange-Imposed Price Limits Via Risk Neutral Valuation

Author

Listed:
  • ARIE HAREL

    (The Zicklin School of Business, Baruch College, The City University of New York, Box B11-220, One Bernard Baruch Way, New York, NY 10010-5585, USA)

  • GIORA HARPAZ

    (The Zicklin School of Business, Baruch College, The City University of New York, Box B11-220, One Bernard Baruch Way, New York, NY 10010-5585, USA)

  • JACK CLARK FRANCIS

    (The Zicklin School of Business, Baruch College, The City University of New York, Box B11-220, One Bernard Baruch Way, New York, NY 10010-5585, USA)

Abstract

Asian and European financial markets impose daily price fluctuation limits on individual securities. In the US several futures exchanges are regulated by price fluctuation limits as well. The price limits in most exchanges are set daily, and they are usually based on a percentage change from the previous day's closing price. We show that the future cash flows of a security subject to price limit regulation resemble that of a distinctive contingent claim. Assuming that the security price follows a lognormal distribution, we use the risk-neutral valuation relation (RNVR) developed by [4] to derive the security valuation, in the presence of price fluctuation limits. The characteristics of the pricing formula are examined analytically and numerically.

Suggested Citation

  • Arie Harel & Giora Harpaz & Jack Clark Francis, 2007. "Pricing Securities With Exchange-Imposed Price Limits Via Risk Neutral Valuation," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 10(03), pages 399-406.
    • Handle: RePEc:wsi:ijtafx:v:10:y:2007:i:03:n:s021902490700424x
    DOI: 10.1142/S021902490700424X
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    Cited by:

    1. Seza Danışoğlu & Z. Nuray Güner, 2018. "Do price limits help control stock price volatility?," Annals of Operations Research, Springer, vol. 260(1), pages 129-157, January.

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