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A censored stochastic volatility approach to the estimation of price limit moves

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  • Hsieh, Ping-Hung
  • Yang, J. Jimmy

Abstract

A censored stochastic volatility model is developed to reconstruct a return series censored by price limits, one popular form of market stabilization mechanisms. When price limits are reached, the observed prices are truncated and the equilibrium prices are unobservable, which makes further financial analyses difficult. The model offers theoretically sound estimates of censored returns and is demonstrated via simulations to outperform existing approaches with respect to the estimates of model parameters, unconditional means, and standard deviations. The algorithm is applied to model stock and futures returns and results are consistent with the simulation outcomes.

Suggested Citation

  • Hsieh, Ping-Hung & Yang, J. Jimmy, 2009. "A censored stochastic volatility approach to the estimation of price limit moves," Journal of Empirical Finance, Elsevier, vol. 16(2), pages 337-351, March.
    • Handle: RePEc:eee:empfin:v:16:y:2009:i:2:p:337-351
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    Cited by:

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    2. Dimitrakopoulos, Stefanos & Dey, Dipak K., 2017. "Discrete-response state space models with conditional heteroscedasticity: An application to forecasting the federal funds rate target," Economics Letters, Elsevier, vol. 154(C), pages 20-23.
    3. 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.
    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. Levy, Tamir & Qadan, Mahmod & Yagil, Joseph, 2013. "Predicting the limit-hit frequency in futures contracts," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 141-148.
    6. Wang, Yuchen & Cao, Xiaping & Wang, Xiaoming & Zhou, Sili, 2023. "Does price limit improve price discovery? Evidence from IPO market in a quasi-natural experiment," Pacific-Basin Finance Journal, Elsevier, vol. 82(C).

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