Effects of Price Limits on Volatility: Evidence from the Istanbul Stock Exchange

Posted: 22 Feb 2005

See all articles by Recep Bildik

Recep Bildik

Borsa Istanbul (Istanbul Stock Exchange)

Selim Elekdag

Johns Hopkins University - Department of Economics

Abstract

In spite of the strong existence of price limits in financial markets, there is not much agreement and information on the effects of price limits on volatility and price discovery, which has important policy implications for the investors and regulators. This study examines the effects of price limits on stock return volatility by testing the overreaction and information hypotheses for the Istanbul Stock Exchange. We implement structural break tests as well as compherensive GARCH framework to estimate the impact of price limits on volatility, controlling for structural breaks, financial and economic crises, trading activity, and business cycle fluctuations. Our results do not support the information hypothesis. The fundamental conclusion of this paper is that the two-hour break between the two daily sessions reduces volatility by acting as a circuit breaker, which facilitates the dissemination of valuable information, thus preventing severe overreactions to news events, which are consistent with the overreaction hypothesis.

Keywords: Price limits, volatility, emerging markets, ARCH-GARCH modelling

JEL Classification: G10, G14

Suggested Citation

Bildik, Recep and Elekdag, Selim, Effects of Price Limits on Volatility: Evidence from the Istanbul Stock Exchange. Available at SSRN: https://ssrn.com/abstract=482062

Recep Bildik (Contact Author)

Borsa Istanbul (Istanbul Stock Exchange) ( email )

Borsa Istanbul
Resitpasa, Emirgan
Istanbul, 34467
Turkey
90-212-298 21 93 (Phone)
90-212-298 25 00 (Fax)

Selim Elekdag

Johns Hopkins University - Department of Economics ( email )

3400 Charles Street
Baltimore, MD 21218-2685
United States
410-516-7601 (Phone)

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