What affects the cool-off duration under price limits?

Pin Huang Chou, Robin K. Chou, Kuan Cheng Ko, Chun Yi Chao

Research output: Contribution to journalArticlepeer-review

10 Scopus citations

Abstract

Price limits supposedly provide a cool-off period that allows investors to reassess the market conditions. They represent an implementation risk, a special form of arbitrage risk, that impedes arbitrageurs from engaging in arbitrage activities to correct for potential mispricing. We conjecture that the cool-off period would be lengthier for stocks that are subject to higher degrees of arbitrage risk and investor sentiment, and that the effect of arbitrage risk is stronger in up-limit hits because of higher short-sale restriction involved. Based on a sample of intraday data from the Taiwan Stock Exchange, we find that stocks with smaller capitalizations and higher idiosyncratic risk tend to have longer limit-hit durations, consistent with the behavioral argument. The empirical results have important policy implications for stock market regulations.

Original languageEnglish
Pages (from-to)256-278
Number of pages23
JournalPacific Basin Finance Journal
Volume24
DOIs
StatePublished - Sep 2013

Keywords

  • Censoring
  • Limit-hit duration
  • Magnet effect
  • Price limits

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