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Price Limits and Beta

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  • Lee, Sang Bin
  • Kim, Dae Joong

Abstract

Price limits, which restrict daily price changes of a stock within a pre-specified range, make the stochastic properties of observed returns deviate from those of true returns, and hence lead to a biased estimates of the market model parameters. To investigate the impacts of price limits on the market model parameters, especially on beta, the restricted regression analysis is performed as well as the two-pass regression analysis used in examining the intervalling effect bias on beta. Empirical results suggest that when prices are observed within a pre specified bound, the estimates of beta using ordinary least squares substantially understate the true beta and suffer more from the intervalling effect bias. However, the delay effect of price limits on the adjustment of a security's price does not last too long, that is, remaining information is reflected on the subsequent day's stock prices very rapidly. Copyright 1997 by Kluwer Academic Publishers

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  • Lee, Sang Bin & Kim, Dae Joong, 1997. "Price Limits and Beta," Review of Quantitative Finance and Accounting, Springer, vol. 9(1), pages 35-52, July.
    • Handle: RePEc:kap:rqfnac:v:9:y:1997:i:1:p:35-52
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    Cited by:

    1. Chou, Pin-Huang & Li, Wen-Shen & Lin, Jun-Biao & Wang, Jane-Sue, 2006. "Estimating the VaR of a portfolio subject to price limits and nonsynchronous trading," International Review of Financial Analysis, Elsevier, vol. 15(4-5), pages 363-376.
    2. 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.

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