Volatility, price resolution, and the effectiveness of price limits

Ma, Chenghu; Rao, Ramesh P.; Sears, R. Stephen

doi:10.1007/bf00122800

Cited by 97 publications

(56 citation statements)

References 20 publications

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“…Our results reflect the importance of proper volatility estimation emphasized by Miller (1989). They stand in sharp contrast to Ma et al (1989) who document a decline in realized volatility after price limits. Combined with our findings F I G U R E 3 Implied volatility around limit days.…”

Section: Implied Volatility Around Limit Eventscontrasting

confidence: 58%

“…Limits events are obviously evidence of elevated volatility. If volatility is driven by speculative activity and price limits curb speculation, subsequent volatility is expected to fall as suggested by Ma et al (1989). Alternatively, if volatility reflects commodity fundamentals that are persistent, we would expect comparable levels of volatility before and after price limits.…”

Section: Implied Volatility Around Limit Eventsmentioning

confidence: 90%

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On commodity price limits

Janardanan

Qiao²,

Rouwenhorst

2019

Journal of Futures Markets

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This paper examines the behavior of futures prices and trader positions around the occurrence of price limits in commodity futures markets. We ask whether limit events are the result of shocks to fundamental volatility or the result of temporary volatility induced by the trading of noncommercial market participants (speculators). We find little evidence that limits events are the result of speculative activity, but instead associated with shocks to fundamentals that lead to persistent price changes. When futures trading halts price discovery migrates to options markets, but option prices provide a biased estimate of subsequent future prices when trading resumes.

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Section: Implied Volatility Around Limit Eventscontrasting

confidence: 58%

Section: Implied Volatility Around Limit Eventsmentioning

confidence: 90%

On commodity price limits

Janardanan

Qiao²,

Rouwenhorst

2019

Journal of Futures Markets

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“…The empirical results are mixed, and the methodology used is questionable. Ma, Rao, and Sears (1989), who examine the impact of hitting price limits on the return and volume behavior of four futures contracts, find that following a limit hit, prices tend to stabilize or even reverse direction, the volatility of prices decreases, and the volume of trade remains unchanged. Therefore, they conclude that price limits cool market reactions without imposing any substantial costs.…”

Section: Futures Marketsmentioning

confidence: 99%

What Makes Circuit Breakers Attractive to Financial Markets? A Survey

Kim¹,

Yang²

2004

Financial Market

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After the stock market crash of October 1987, the Brady Report (1988) and several academic researchers suggested the imposition of ''circuit breakers'' to prevent the market from fluctuating excessively. Most financial markets in the world have imposed circuit breaker systems, in the form of price limits and trading halts, in an attempt to reduce excessive market volatility. Similar to any other regulations, circuit breakers have proponents and opponents. In this survey, we analyze the benefits and costs of each type of circuit breaker, provide existing theoretical models and predictions related to each type of circuit breaker, and present findings from empirical studies to justify or disqualify the existence of circuit breakers. In addition, we synthesize existing studies and offer directions for further research in this area.

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“…There are several arguments made to support the imposition of daily price limits by regulators and exchanges (e.g., Brennan 1986;Ma, Rao, and Sears 1989;France, Kodres, and Moser 1994). The overreaction hypothesis is the most popular argument.…”

Section: Introductionmentioning

confidence: 99%

Are Price Limits Effective? Evidence From the Istanbul Stock Exchange

Bildik

Gülay

2006

J of Financial Research

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There is considerable discussion about controlling volatility by imposing price limits on asset prices. We examine the effects of price limits on a stock market by testing the volatility spillover, delayed price discovery, and trading interference hypotheses in a leading emerging market, the Istanbul Stock Exchange, which has a unique market microstructure as related to price limits. Our results support the volatility spillover, delayed price discovery, and trading interference hypotheses. We also show price locks at limits provide significantly stronger evidence regarding the effects of price limits than limit moves only. Finally, price limits have a significant effect on the stock market, casting doubt on their effectiveness. 2006 The Southern Finance Association and the Southwestern Finance Association.

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Volatility, price resolution, and the effectiveness of price limits

Cited by 97 publications

References 20 publications

On commodity price limits

On commodity price limits

What Makes Circuit Breakers Attractive to Financial Markets? A Survey

Are Price Limits Effective? Evidence From the Istanbul Stock Exchange

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