Price Limit Expansion and Volatility: A Theoretical Perspective*
- Authors
- Lee, Jeong Hwan; Su, Xin; Yoo, Jin
- Issue Date
- Jun-2021
- Publisher
- WILEY
- Keywords
- Censored distribution; Investor rationality; Korean stock market; Price limit; Volatility
- Citation
- ASIA-PACIFIC JOURNAL OF FINANCIAL STUDIES, v.50, no.3, pp.271 - 287
- Indexed
- SSCI
SCOPUS
KCI
- Journal Title
- ASIA-PACIFIC JOURNAL OF FINANCIAL STUDIES
- Volume
- 50
- Number
- 3
- Start Page
- 271
- End Page
- 287
- URI
- https://scholarworks.bwise.kr/hanyang/handle/2021.sw.hanyang/32707
- DOI
- 10.1111/ajfs.12328
- ISSN
- 2041-9945
- Abstract
- We theoretically examine whether and how price limit expansion changes return volatility. This study incorporates competing hypotheses regarding investor reactions to limit-hit events into a model that considers trader irrationality; we then conduct several simulations. We find that, when price limits are widened, stock return volatility tends to increase but may also remain unchanged or decrease. We consider the implications of the study's main findings, which shed light on the mixed empirical results found in the price limit literature so far.
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