Price Limits and Beta

Sang Bin Lee and Dae Joong Kim

Review of Quantitative Finance and Accounting, 1997, vol. 9, issue 1, 35-52

Abstract: Price limits, which restrict daily price changes of a stock within a pre-specified range, make the stochastic properties of observed returns deviate from those of true returns, and hence lead to a biased estimates of the market model parameters. To investigate the impacts of price limits on the market model parameters, especially on beta, the restricted regression analysis is performed as well as the two-pass regression analysis used in examining the intervalling effect bias on beta. Empirical results suggest that when prices are observed within a pre specified bound, the estimates of beta using ordinary least squares substantially understate the true beta and suffer more from the intervalling effect bias. However, the delay effect of price limits on the adjustment of a security's price does not last too long, that is, remaining information is reflected on the subsequent day's stock prices very rapidly. Copyright 1997 by Kluwer Academic Publishers

Date: 1997
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