The behaviour of stock returns under price limits, a truncated time series approach

Eymen Errais and Jawhar Albacha

American Journal of Finance and Accounting, 2021, vol. 6, issue 3/4, 223-251

Abstract: The Tunisian Stock Exchange is subject to some authorities' regulations, constraints and limitations such as price limits. Hence, both of the following distortions will occur as a consequence to price limitations: unconditional equilibrium prices, 'shadowed prices', are unobservable by agents due to the fact that the asset valuation will be guided by the limited future prices assumption and the conditional equilibrium prices, 'shadowing prices', which are not observed by agents because they can exercise only a price that is within a limited range. Thus, the estimation of the 'fair' value of the asset will be complex and the existing trading strategies that focus only on observed prices will be inefficient. In this paper we will discuss the impact of price limitations on the stock returns behaviour and develop an inference methodology in order to extract and collect useful information about the shadowing prices based on truncated population. Finally, we develop a heuristic truncated normality test based on the JB test.

Keywords: price limits; truncated time series; truncated normal distribution; JB test; maximum likelihood estimator. (search for similar items in EconPapers)
Date: 2021
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