Title

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

Publication Type

Journal Article

Publication Date

2005

Abstract

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%.

Keywords

Price limit, Information asymmetry, Informed traders, Order imbalance, Kuala Lumpur Stock Exchange

Discipline

Finance and Financial Management | Portfolio and Security Analysis

Research Areas

Finance

Publication

Journal of Empirical Finance

Volume

12

Issue

2

First Page

269

Last Page

290

ISSN

0927-5398

Identifier

10.1016/j.jempfin.2004.01.001

Publisher

Elsevier