Effects of Price Limits on Volatility: Evidence from the Istanbul Stock Exchange
Recep Bildik and
Emerging Markets Finance and Trade, 2004, vol. 40, issue 1, 5-34
In spite of the strong existence of price limits in financial markets, there is not much agreement and information on the effects of price limits on volatility and price discovery, which has important policy implications for the investors and regulators. This study examines the effects of price limits on stock return volatility by testing the overreaction and information hypotheses for the Istanbul Stock Exchange. We implement structural break tests as well as a comprehensive GARCH framework to estimate the impact of price limits on volatility, controlling for structural breaks, financial and economic crises, trading activity, and business cycle fluctuations. Our results do not support the information hypothesis. The fundamental conclusion of this paper is that the two-hour break between the two daily sessions reduces volatility by acting as a circuit breaker, which facilitates the dissemination of valuable information, thus preventing severe overreactions to news events, which are consistent with the overreaction hypothesis.
Keywords: ARCH-GARCH modeling; emerging markets; price limits; volatility (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:mes:emfitr:v:40:y:2004:i:1:p:5-34
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