Price Limit Performance: evidence from transactions data and the limit order book

In recent years, organized stock exchanges with daily price limits adopted wider limits as narrower limits were criticized for jeopardizing market efficiency. This study examines the impact of a wide price limit on price discovery processes, using data from the Kuala Lumpur Stock Exchange. Specifica...

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Bibliographic Details
Main Authors: CHAN, Soon Huat, Kim, Kenneth A., Rhee, S. Ghon
Format: text
Language:English
Published: Institutional Knowledge at Singapore Management University 2005
Subjects:
Online Access:https://ink.library.smu.edu.sg/lkcsb_research/2971
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Institution: Singapore Management University
Language: English
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Summary:In recent years, organized stock exchanges with daily price limits adopted wider limits as narrower limits were criticized for jeopardizing market efficiency. This study examines the impact of a wide price limit on price discovery processes, using data from the Kuala Lumpur Stock Exchange. Specifically, examined is the impact of daily price limits on (i) information asymmetry; (ii) arrival rates of informed traders; and (iii) order imbalance. Using both trade-to-trade transaction data and the limit order book, we compile evidence that price limits do not improve information asymmetry, delays the arrival of informed traders, and exacerbates order imbalance. These results suggest that price limits on individual securities do not improve price discovery processes but impose serious costs even when the limit band is as wide as 30%.