Toward a Flexible Price Limit System

Posted: 25 Mar 2008

See all articles by Saikat S. Deb

Saikat S. Deb

Deakin University - School of Accounting, Economics and Finance

Petko S. Kalev

La Trobe Business School

Vijaya B. Marisetty

RMIT University; Financial Research Network (FIRN)

Multiple version iconThere are 2 versions of this paper

Date Written: August 1, 2007

Abstract

This paper proposes an improvement to the existing price limit systems. Using price limit data from Tokyo Stock Exchange, this study shows that price limits are costly when they obstruct rational price movements. Observable events, such as volatility spillovers and consecutive price limit hits, associated to improper price limit imposition can be predicted using proxies of informed and uninformed trading, changes in order imbalance, number of trades hitting price limit, fraction of the trading day affected by limit hit and security characteristics such as size, growth and idiosyncratic risk. We propose a flexible price limit system based on the predicted likelihood of improper price limit imposition. We suggest that if exchange-officials decide on relaxing or continue imposing price limits for a trading day based on predicted probability of volatility spillover and consecutive hit then price limit rules could become effective.

Keywords: Price Limits, Volatility Spillover, Probit Model

JEL Classification: G10, G18, G19

Suggested Citation

Deb, Saikat Sovan and Kalev, Petko S. and Marisetty, Vijaya B., Toward a Flexible Price Limit System (August 1, 2007). Available at SSRN: https://ssrn.com/abstract=1112508

Saikat Sovan Deb (Contact Author)

Deakin University - School of Accounting, Economics and Finance ( email )

Building lb Room 5.305
221 Burwood Highway Victoria
Burwood, Victoria 3125
Australia
0061 3 92517745 (Phone)
+61 3 9244 6283 (Fax)

HOME PAGE: http://www.deakin.edu.au/buslaw/aef/

Petko S. Kalev

La Trobe Business School ( email )

Department of Economics and Finance
Donald Whitehead Building: Level 3, DWB313
Bundoora, Victoria 3086
Australia
+613 9479 6285 (Phone)
+613 9479 1654 (Fax)

HOME PAGE: http://www.latrobe.edu.au/business/about/staff/profile?uname=PKalev

Vijaya B. Marisetty

RMIT University ( email )

Business
Level 12, 239 Bourke Street
Melbourne, Victoria 3000
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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