The Effect of Price Limits on Intraday Volatility and Information Asymmetry

17 Pages Posted: 10 Mar 2008 Last revised: 19 Nov 2016

See all articles by Yong H. Kim

Yong H. Kim

University of Cincinnati

J. Jimmy Yang

Oregon State University - College of Business

Date Written: 2008

Abstract

We investigate the effect of price limits on intra-day volatility and information asymmetry using transactions data from the Taiwan Stock Exchange. Proponents of price limits argue that they provide an opportunity for investors to reevaluate market information and make more rational trading decisions. We identify three different limit hits - closing, single, and consecutive - and hypothesize that only the consecutive limit hits are likely to provide such an opportunity, namely, to counter investor overreaction(volatility hypothesis) and to enhance information revelation (information asymmetry hypothesis). Our empirical evidence supports the volatility hypothesis. Our findings generate important policy implications for stock markets that have price limits.

Keywords: Price limits, Overreaction, Volatility, Information asymmetry, Transactions data

JEL Classification: G14, G15, G18

Suggested Citation

Kim, Yong H. and Yang, J. Jimmy, The Effect of Price Limits on Intraday Volatility and Information Asymmetry (2008). Pacific-Basin Finance Journal, 16 (5), 2008, 522-538, Available at SSRN: https://ssrn.com/abstract=1103748 or http://dx.doi.org/10.2139/ssrn.1103748

Yong H. Kim (Contact Author)

University of Cincinnati ( email )

Lindner College of Business
410 Carl H. Lindner Hall, P.O. Box 210195
Cincinnati, OH 45221
United States
513-556-7084 (Phone)
513-556-0979 (Fax)

J. Jimmy Yang

Oregon State University - College of Business ( email )

School of Accounting, Finance, and Information Sys
426 Austin Hall
Corvallis, OR 97331
United States
541-737-6005 (Phone)
541-737-4890 (Fax)

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