What affects the cool-off duration under price limits?

Pin-Huang Chou, Robin K. Chou, Kuan-Cheng Ko and Chun-Yi Chao

Pacific-Basin Finance Journal, 2013, vol. 24, issue C, 256-278

Abstract: Price limits supposedly provide a cool-off period that allows investors to reassess the market conditions. They represent an implementation risk, a special form of arbitrage risk, that impedes arbitrageurs from engaging in arbitrage activities to correct for potential mispricing. We conjecture that the cool-off period would be lengthier for stocks that are subject to higher degrees of arbitrage risk and investor sentiment, and that the effect of arbitrage risk is stronger in up-limit hits because of higher short-sale restriction involved. Based on a sample of intraday data from the Taiwan Stock Exchange, we find that stocks with smaller capitalizations and higher idiosyncratic risk tend to have longer limit-hit durations, consistent with the behavioral argument. The empirical results have important policy implications for stock market regulations.

Keywords: Price limits; Limit-hit duration; Magnet effect; Censoring (search for similar items in EconPapers)
JEL-codes: C13 C53 G14 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:24:y:2013:i:c:p:256-278

DOI: 10.1016/j.pacfin.2013.01.004

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