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Are price limits really bad for equity markets?

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  • Deb, Saikat Sovan
  • Kalev, Petko S.
  • Marisetty, Vijaya B.

Abstract

Despite widely documented criticisms, price-limit rules are present in many equity markets around the world. Using a game-theoretic model, we argue that, if the cost of monitoring a market is high, price-limit rules are beneficial. Empirical tests based on a cross section of 43 equity markets across five continents support our theoretical prediction. We find that the probability of the existence of price-limit rules is greater in markets that incur higher monitoring costs due to poorer business disclosure, more corruption and less efficiency in legal, regulatory and technological environments.

Suggested Citation

  • Deb, Saikat Sovan & Kalev, Petko S. & Marisetty, Vijaya B., 2010. "Are price limits really bad for equity markets?," Journal of Banking & Finance, Elsevier, vol. 34(10), pages 2462-2471, October.
    • Handle: RePEc:eee:jbfina:v:34:y:2010:i:10:p:2462-2471
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    Cited by:

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    3. Hsin, Chin-Wen & Peng, Shu-Cing, 2023. "Investor propensity to speculate and price delay in emerging markets," International Review of Financial Analysis, Elsevier, vol. 86(C).
    4. Manhwa Wu & Paoyu Huang & Yensen Ni, 2020. "The Impact of Institutional Shareholdings on Price Limits," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 27(3), pages 343-361, September.
    5. 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).
    6. Tsai, Kuo-Ting & Lih, Jiann-Shing & Ko, Jing-Yuan, 2012. "The overnight effect on the Taiwan stock market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(24), pages 6497-6505.
    7. Zhe An & Zhian Chen & Donghui Li & Lu Xing, 2018. "Individualism and stock price crash risk," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 49(9), pages 1208-1236, December.
    8. 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.
    9. Xiao, Yuewen & Zheng, Xinwei & Wang, Chengsi, 2024. "Price limit hits in the Chinese fund market: Determinants and post-hit performance," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 70-82.
    10. Leippold, Markus & Wang, Qian & Zhou, Wenyu, 2022. "Machine learning in the Chinese stock market," Journal of Financial Economics, Elsevier, vol. 145(2), pages 64-82.
    11. Gatchev, Vladimir A. & Seth, Rama & Singh, Ajai & Vishwanatha, S.R., 2023. "Price bands and their effects on equity markets: Evidence from a natural experiment," Journal of Financial Markets, Elsevier, vol. 66(C).
    12. James Brugler & Oliver Linton, 2014. "Circuit Breakers on the London Stock Exchange: Do they improve subsequent market quality?," Cambridge Working Papers in Economics 1453, Faculty of Economics, University of Cambridge.
    13. Deb, Saikat Sovan & Kalev, Petko S & Marisetty, Vijaya B, 2017. "Price limits and volatility," Pacific-Basin Finance Journal, Elsevier, vol. 45(C), pages 142-156.
    14. James Brugler & Oliver Linton, 2014. "Single stock circuit breakers on the London Stock Exchange: do they improve subsequent market quality?," CeMMAP working papers CWP07/14, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
    15. Zhengyang Bao & Kenan Kalayci & Andreas Leibbrandt & Carlos Oyarzun, 2019. "Regulating Bubbles Away?Experiment-Based Evidence of Price Limits and Trading Restrictions in Asset Markets with Deterministic and Stochastic Fundamental Values," Monash Economics Working Papers 14-18, Monash University, Department of Economics.
    16. Chen, Jian & Haboub, Ahmad & Khan, Ali, 2024. "Limits of arbitrage and their impact on market efficiency: Evidence from China," Global Finance Journal, Elsevier, vol. 59(C).
    17. Tang, Siyuan, 2023. "Price limit performance: New evidence from a quasi-natural experiment in China's ChiNext market," International Review of Financial Analysis, Elsevier, vol. 89(C).
    18. 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.
    19. Chu, Shan-Ying & Chan, Lin Kun & Yeh, Jin-Huei, 2019. "The stabilizing effects of price limits: New evidence from jump contributed price variations," The North American Journal of Economics and Finance, Elsevier, vol. 48(C), pages 529-539.
    20. Bao, Zhengyang & Kalaycı, Kenan & Leibbrandt, Andreas & Oyarzun, Carlos, 2020. "Do regulations work? A comprehensive analysis of price limits and trading restrictions in experimental asset markets with deterministic and stochastic fundamental values," Journal of Economic Behavior & Organization, Elsevier, vol. 178(C), pages 59-84.
    21. Deb, Saikat Sovan & Kalev, Petko S. & Marisetty, Vijaya B., 2013. "Flexible price limits: The case of Tokyo Stock Exchange," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 24(C), pages 66-84.
    22. Chen, Ting & Gao, Zhenyu & He, Jibao & Jiang, Wenxi & Xiong, Wei, 2019. "Daily price limits and destructive market behavior," Journal of Econometrics, Elsevier, vol. 208(1), pages 249-264.
    23. Wonse Kim & Sungjae Jun, 2018. "Effects of a Price limit Change on Market Stability at the Intraday Horizon in the Korean Stock Market," Papers 1805.04728, arXiv.org.
    24. LIN, Fengjiao & QIU, Zhigang & ZHENG, Weinan, 2023. "Cranes among chickens: The general-attention‐grabbing effect of daily price limits in China's stock market," Journal of Banking & Finance, Elsevier, vol. 150(C).

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