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Frontiers in Finance and Economics is a UGC APPROVED International Journal of Research

The Effect of Price Limits on Unconditional Volatility:The Case of CASE

Medhat Hassanein  Eskandar A. Tooma
This nonparametric policy-shift event study examines the relationship between symmetric price limit mechanisms and stock market volatility. We investigate price dynamics on the Cairo and Alexandria Stock Exchange (CASE), where three different limit regimes were in place between 1994 and 2004. We find when price limits are made tighter (looser) by regulators stock market volatility is usually not lower (higher).    These results contradict the widely held view among regulators that restrictive price limits can moderate volatility.  We attribute the source of higher volatility that the CASE experienced, during the tightest limit regime, to volatility on subsequent trading days increasing as limits prevent large one-day price changes. Previous research has referred to this phenomenon as the “volatility spillover” of daily price limits.
Keywords: Price Limits, Circuit Breakers, Stock Market Volatility, Egyptian Stock Exchange.
JEL Classifications: G14, G15, G18
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