Price Efficiency Under Daily Price Limit Regimes: Evidence from Emerging Markets

Abstract

I study the role of daily price limits on price efficiency and liquidity. Daily price limits are widely used in emerging markets as a cooling-off period to counter noise trading and alleviate market panic. This mechanism affects firms in various industries and investor types differently in the short term and long run. Utilizing a differences-indifferences framework, I measure the effects of asymmetric daily price limits in Iran's stock market, which were unexpectedly set in February 2021 to cushion the market's downward trend. Additionally, I compare the impacts of symmetric and asymmetric daily price limits in an economy with and without mandatory market making. Furthermore, I identify key indicator factors, both within and outside the market, such as political unrest, that have predictive power for daily price limit policymaking. The findings of this paper shed light on the effectiveness of delayed overreaction on price discovery in emerging markets, which is valuable for policymakers and investors.

Keywords: Price Efficiency Under Daily Price Limit Regimes: Evidence from Emerging Markets Noise traders, Informed traders, Information asymmetry, Market clearing, Market access, Causal study, Market microstructure, Differences-in-Differences(DiD), Price discovery, Emerging markets