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 language | English |
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Pages (from-to) | 256-278 |
Number of pages | 23 |
Journal | Pacific Basin Finance Journal |
Volume | 24 |
DOIs | |
State | Published - Sep 2013 |
Keywords
- Censoring
- Limit-hit duration
- Magnet effect
- Price limits