Are price limits really bad for equity markets?

Deb, Saikat Sovan; Kalev, Petko S.; Marisetty, Vijaya B.

doi:10.1016/j.jbankfin.2010.04.001

Cited by 51 publications

(13 citation statements)

References 33 publications

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“…Finally, as individualistic countries place more emphasis on individual freedom and thus are less likely to impose limit rules on individual stocks' daily price variation, 6 we control for the dummy indicator of the presence of daily price limit rules on the country's major stock exchanges (Price_Limit), which is collected from Deb, Kalev, and Marisetty (2010) and stock exchange websites. We find that the price limit rules can curb crash risk.…”

Section: < Insert Table 4 >mentioning

confidence: 99%

Individualism and stock price crash risk

Chen

et al. 2018

J Int Bus Stud

108

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Employing a sample of 26,473 firms across 42 countries from 1990 to 2013, we find that firms located in countries with higher individualism have higher stock price crash risk. Furthermore, individualism can be transmitted by foreign investors from overseas markets to influence local firms' crash risk, and can exacerbate the impact of firm risk taking and earnings management on crash risk. Moreover, the positive relation between individualism and crash risk is amplified during the global financial crisis and attenuated by enhanced country-level financial information transparency and the adoption of International Financial Reporting Standards.

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confidence: 99%

Individualism and stock price crash risk

Chen

et al. 2018

J Int Bus Stud

108

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“…This argument maybe applicable for price limit rules too, as once price limit for the day is reached these rules impose a virtual trading halt unless traders revise their price. Deb, Kalev and Marisetty (2007) also support utility of these rules and conclude that price limit rules can be beneficial in markets that are prone to price manipulation and difficult to monitor.…”

Section: Price Limits Pros and Consmentioning

confidence: 63%

“…In the literature of price limit rules there are several important papers such as Brennan (1986), Kodres and O'Brien (1994) and Anshuman and Subrahmanyam (1999) that contribute towards designing optimal price limits for futures market. Deb et al (2007) discusses optimal daily price limits in the presence of price manipulators. In contrast to these studies, here we argue that theoretically it may be possible to find out an optimal price limit for each security in the market, but in practice, it would be difficult to implement such an elaborate price limits system.…”

Section: Flexible Price Limit -The Ideamentioning

confidence: 99%

Toward a Flexible Price Limit System

2009

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“…However, in a trading environment that deviates from full information and perfect competition, trading halts and price limits can theoretically lead to an improvement in welfare. Specifically, improvements can be wrought from mitigation of information asymmetry (Spiegel and Subrahmanyam, 2000), reduction in "transactional risk" 3 (Greenwald and Stein, 1991;Kodres and O'Brien, 1994), reduction of counter-party risk in derivatives markets and for leveraged investors (Chowdhry and Nanda, 1998;Brennan, 1986), limitations to the gains from market manipulation (Kim and Park, 2010) and the associated costs of monitoring market manipulation (Deb et al, 2010), and by reducing volatility and price deviations from fundamentals driven by noise traders (Westerhoff, 2003).…”

Section: Related Literaturementioning

confidence: 99%

Circuit Breakers on the London Stock Exchange: Do They Improve Subsequent Market Quality?

Brugler

Linton

2014

SSRN Journal

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This paper uses proprietary data to evaluate the efficacy of single-stock circuit breakers on the London Stock Exchange during July and August 2011. We exploit exogenous variation in the length of the uncrossing periods that follow a trading suspension to estimate the effect of auction length on market quality, measured by volume of trades, frequency of trading and the change in realised variance of returns. We also estimate the effect of a trading suspension in one FTSE-100 stock on the volume of trades, trading frequency and the change in realised variance of returns for other FTSE-100 stocks. We find that auction length has a significant detrimental effect on market quality for the suspended security when returns are negative but no discernible effect when returns are positive. We also find that trading suspensions help to ameliorate the spread of market microstructure noise and price inefficiency across securities during falling markets but the reverse is true during rising markets. Although trading suspensions may not improve the trading process within a particular security, they do play an important role preventing the spread of poor market quality across securities in falling markets and therefore can be effective tools for promoting market-wide stability.

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Are price limits really bad for equity markets?

Cited by 51 publications

References 33 publications

Individualism and stock price crash risk

Individualism and stock price crash risk

Toward a Flexible Price Limit System

Circuit Breakers on the London Stock Exchange: Do They Improve Subsequent Market Quality?

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