Effects of a price limit change on market stability at the intraday horizon in the Korean stock market

Abstract

This paper investigates the effects of a price limit change on the volatility of the Korean stock market's (KRX) intraday stock price process. Based on the most recent transaction data from the KRX, which experienced a change in the price limit on June 15, 2015, we examine the change in realized variance after the price limit change to investigate the overall effects of the change on the intraday market volatility. We then analyze the effects in more detail by applying the discrete Fourier transform (DFT) to the data set. We find evidence that the market becomes more volatile in the intraday horizon because of the increase in the amplitudes of the low-frequency components of the price processes after the price limit change. Therefore, liquidity providers are in a worse situation than they were prior to the change. JEL classification: C22; G15; G18

The effects of the introduction of Bitcoin futures on the volatility of Bitcoin returns

“…To analyze the change in the intraday volatility of Bitcoin prices in more detail, we applied DFT to the intraday Bitcoin price time series, as in Kim and Jun (2018). The Fourier coefficients of Bitcoin's price time series on day t are given by:…”

“…By performing an analysis based on DFT in addition to an analysis using realized volatility, we can get a realistic, robust, and detailed results on the change in intraday Bitcoin volatility after trading of Bitcoin futures was introduced (Kim and Jun 2018). To the best of our knowledge, this study is the first to investigate empirically the long-term effect of the launch of Bitcoin futures on Bitcoin's market stability.…”

Price Limit Expansion and Volatility: A Theoretical Perspective*

“…We examine this issue driven by three motivations. First, the research on price limits has been much more empirical than theoretical; theoretical research on the effects of price limit expansion and stock market volatility is even scarcer, although a few empirical analyses have been conducted on the Taiwan stock exchange (Kim 2001;Lien et al 2019) and Korean stock exchange (Kim and Jun 2019). Second, hypotheses on price limits have rarely been presented rigorously or mathematically.…”

“…Furthermore, most of the theoretical research has focused on price limits in futures rather than equity markets (Brennan 1986;Kodres and O'Brien 1994;Shanker and Balakrishnan 2005). The empirical results on price limits and volatility are mixed, finding both increased or non-decreased volatility (Santoni and Liu 1993;Kim and Rhee 1997;Phylaktis et al 1999;Corwin and Lipson 2000;Cho et al 2003;Edelson and Gervais 2003;Kim and Jun 2019) and decreased volatility (Lauterbach and Ban-Zion 1993;Kim 2001;Berkman and Lee 2002;Bildik and Elekdag 2004;Nath 2005;Kim and Yang 2008). Lee and Chung (1996) find that the Korean stock market is inefficient in the presence of price limits, whereas Ryoo and Smith (2002) present mixed results.…”

“…1999; Corwin and Lipson 2000; Cho et al . 2003; Edelson and Gervais 2003; Kim and Jun 2019) and decreased volatility (Lauterbach and Ban‐Zion 1993; Kim 2001; Berkman and Lee 2002; Bildik and Elekdag 2004; Nath 2005; Kim and Yang 2008). Lee and Chung (1996) find that the Korean stock market is inefficient in the presence of price limits, whereas Ryoo and Smith (2002) present mixed results.…”