Estimating the Effect of Price Limits on Limit-Hitting Days

18 Pages Posted: 17 Mar 2005

See all articles by Jeff Chung

Jeff Chung

University of California, Berkeley - Department of Economics

Li Gan

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

Abstract

This study examines whether price limits affect underlying equilibrium prices on limit-hitting days. To identify two effects - a ceiling effect and a cooling or heating effect (C-H effect) - we use the fact that equilibrium prices are reached at the day immediately after price limits are hit. We estimate the C-H effect by letting the return series be mixture normal to capture the possible 'fat tails.' We apply our models to five randomly selected Taiwanese stocks and all the continuously traded stocks in our sample period. The simple normal density which would lead one to conclude that price limits can 'cool off' stock prices is soundly rejected. However, if normal mixture density is used, one would generally conclude that price limits will have no effect on the variance of stock returns.

Suggested Citation

Chung, Jeff and Gan, Li, Estimating the Effect of Price Limits on Limit-Hitting Days. Econometrics Journal, Vol. 8, No. 1, pp. 79-96, March 2005. Available at SSRN: https://ssrn.com/abstract=682847

Jeff Chung

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States

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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