Price Limits: How Effective? Evidence from the Istanbul Stock Exchange

Abstract

There has been considerable discussion in policy circles about controlling volatility by imposing price limits on asset prices. This study examines the effects of price limits on a stock market by testing volatility spillover, delayed price discovery, and trading interference hypotheses in a leading emerging market, Istanbul Stock Exchange (ISE), which has a unique microstructure with related to price limits. Our results support volatility spillover, delayed price discovery, and trading interference hypotheses. We also show price locks at limits measured by Volume-Weighted Average Prices provide significantly stronger evidence regarding the effects of price limits than measurement of limit moves only. Finally, price limits have a significant impact on stock market, casting doubt on their effectiveness in financial markets.

Keywords: Price limits, volatility, microstructure, overreaction, price discovery

JEL Classification: G10, G14