Toward a Flexible Price Limit System
54 Pages Posted: 24 Aug 2009 Last revised: 26 Aug 2009
Date Written: August 23, 2009
We argue that majority of the price limits imposed by stock exchanges are improper due to their rigid and objective criteria. 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 more effective. We support our hypothesis using intraday data of Tokyo Stock Exchange listed stocks for a period of 5years between 2001 to 2005.
Keywords: Price Limits, Volatility Spill Over, Market Microstraucture
JEL Classification: G10, G18
Suggested Citation: Suggested Citation