Empirical Estimates of Effect of Price Limits on Limit-Hitting Days

24 Pages Posted: 21 Dec 2000

See all articles by Jeff Chung

Jeff Chung

HypoVereinsbank - Singapore

Li Gan

Texas A&M University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: August 2000

Abstract

In this study, we demonstrate how price limits can affect a return series on limit-hitting days. Our identification of two effects - a ceiling effect and a cooling or heating effect (C-H effect) is based on a resampling method suggested by Wei and Chiang (1999). We estimate the C-H effect by assuming that the return series will have a mixture normal density instead of a simple normal density. We apply our model to five randomly selected Taiwanese stocks as well as all the stocks that are continuously traded in our sample. The simple normal density is soundedly rejected and it would generally lead one to conclude that price limits can "cool off" stock prices. On the other hand, if normal mixture density is used, one would generally conclude that price limits will have no effect on the variance of stock returns.

Keywords: Price limits, mixture density

JEL Classification: G15

Suggested Citation

Chung, Jeff and Gan, Li, Empirical Estimates of Effect of Price Limits on Limit-Hitting Days (August 2000). Available at SSRN: https://ssrn.com/abstract=253913 or http://dx.doi.org/10.2139/ssrn.253913

Jeff Chung

HypoVereinsbank - Singapore ( email )

1 Finlayson Green
Singapore 049246
Republic of Singapore

Li Gan (Contact Author)

Texas A&M University - Department of Economics ( email )

5201 University Blvd.
College Station, TX 77843-4228
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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