Do price limits help control stock price volatility?

Seza Danışoğlu () and Z. Nuray Güner ()
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Seza Danışoğlu: Middle East Technical University
Z. Nuray Güner: Middle East Technical University

Annals of Operations Research, 2018, vol. 260, issue 1, No 8, 129-157

Abstract: Abstract On the negative side, price limits are criticized for increasing stock price volatility and hindering the price discovery process. On the positive side, price limits are argued to give panicky investors additional time to reassess their judgments and thus provide an opportunity for correcting the element of overreaction in pricing stocks. This study analyzes the effectiveness of price limits in Borsa Istanbul by utilizing a propensity-matched control sample in addition to the traditional benchmarks used in the literature. Similar to recent research, we find strong evidence that price limits lead to increased and persistent price volatility and decreased liquidity. We also provide evidence that price limits interfere with the price discovery process. Results show that smaller stocks with larger volatility and higher trading volume are more likely to experience limit hits. Furthermore, the difference in the findings from the matched control sample and the traditional benchmarks points out the importance of accounting for firm- and market-related characteristics when analyzing the effect of price limits.

Keywords: Price limit; Volatility; Price discovery (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1007/s10479-016-2317-y

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