Abstract

In this study, we demonstrate how price limits can affect a return series on limit-hitting days. Our identification of two effects -- a ceiling effect and a cooling or heating effect (C-H effect) is based on a resampling method suggested by Wei and Chiang (1999). We estimate the C-H effect by assuming that the return series will have a mixture normal density instead of a simple normal density. We apply our models to five randomly selected Taiwnese stocks as well as all the stocks that are continuously traded in our sample period. The simple normal density is soundly rejected and it would generally lead one to conclude that price limits can "cool off" stock prices. On the other hand, if normal mixture density is used, one would generally conclude that price limits will have no effect on the variance of stock returns.

Citations