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Tail risk under price limits

Sekyung Oh, Hyukdo Kee and Kinam Park

Economic Modelling, 2019, vol. 77, issue C, 113-123

Abstract: This study investigates tail risk dynamics when price limits exist in stock markets, which have not been examined in the previous literature. We present the expected value of tail risk under price limits and then analyze the extent to which such limits affect Korean stock markets when they are eased gradually. The main results are threefold. First, tail risk is seriously underestimated in stock markets with a price limit system. Second, tail risk is a significant risk factor in determining asset prices if price limits are above a certain level (15%). Lastly, related to the Korean economy, tail risk has predictive power to the future stock returns when the price limit is more than 15%. In particular, tail risk has no predictive power until price limits are relaxed to 15%, implying that caution is needed when the effects of tail risk are analyzed in countries where price limits exist.

Keywords: Tail risk; Price limit; Systemic risk; Risk price (search for similar items in EconPapers)
JEL-codes: G11 G12 G17 (search for similar items in EconPapers)
Date: 2019
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Handle: RePEc:eee:ecmode:v:77:y:2019:i:c:p:113-123