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Limit-hitting exciting effects: Modeling jump dependencies in stock markets adhering to daily price-limit rules

Author

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  • Chen, Jian
  • Qi, Shuyuan

Abstract

Price limits are widely implemented in stock markets worldwide; however, they are rarely considered in financial models. In this study, we propose a model specifically designed for asset prices that adhere to daily price-limit mechanisms. Our model captures the interdependence among limit-hitting events and other small price jumps by using a multivariate mutually-exciting point process. It is applicable to any stock market with a multi-layer price limit mechanism. By analyzing data from all publicly listed A-share stocks in China from 2007 to 2021, we demonstrate that our model outperforms other classic models in terms of goodness of fit. Additionally, we find that limit-hitting jumps, as opposed to inconspicuous small price jumps, have a higher propensity to attract investors' attention and result in subsequent price jumps. We further construct a clustering index based on the model parameters and investigate its determinants.

Suggested Citation

  • Chen, Jian & Qi, Shuyuan, 2024. "Limit-hitting exciting effects: Modeling jump dependencies in stock markets adhering to daily price-limit rules," Journal of Banking & Finance, Elsevier, vol. 163(C).
    • Handle: RePEc:eee:jbfina:v:163:y:2024:i:c:s0378426624001018
    DOI: 10.1016/j.jbankfin.2024.107184
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    More about this item

    Keywords

    Price limits; Jump clustering; Bayesian inference; Hawkes process; Stochastic volatility;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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