Why Do Price Limits Exist in Stock Markets? A Manipulation-Based Explanation

23 Pages Posted: 1 Mar 2010

See all articles by Kenneth Kim

Kenneth Kim

SUNY at Buffalo - School of Management

Jungsoo Park

Sogang University

Abstract

Numerous stock market regulators around the world impose daily price limits on individual stock price movements. We derive a simple model that shows that price limits may deter stock market manipulators. Based on our model's implications, we predict that regulators impose price limit rules for markets where the likelihood of manipulation is high. We present empirical evidence consistent with this hypothesis. Our study is the first to formally propose a manipulation-based rationale for the existence of price limits in stock markets.

Suggested Citation

Kim, Kenneth A. and Park, Jungsoo, Why Do Price Limits Exist in Stock Markets? A Manipulation-Based Explanation. European Financial Management, Vol. 16, Issue 2, pp. 296-318, March 2010. Available at SSRN: https://ssrn.com/abstract=1560166 or http://dx.doi.org/10.1111/j.1468-036X.2008.00456.x

Kenneth A. Kim (Contact Author)

SUNY at Buffalo - School of Management ( email )

Jacobs Management Center
Buffalo, NY 14222
United States

Jungsoo Park

Sogang University ( email )

35 Baekbeom-ro
Seoul, 121-742

HOME PAGE: http://hompi.sogang.ac.kr/parkjs

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