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. 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%.
Price limit, Information asymmetry, Informed traders, Order imbalance, Kuala Lumpur Stock Exchange
Finance and Financial Management | Portfolio and Security Analysis
Journal of Empirical Finance
CHAN, Soon Huat; Kim, Kenneth A.; and Rhee, S. Ghon.
Price Limit Performance: evidence from transactions data and the limit order book. (2005). Journal of Empirical Finance. 12, (2), 269-290. Research Collection Lee Kong Chian School Of Business.
Available at: http://ink.library.smu.edu.sg/lkcsb_research/2971