Price Limit Performance: Evidence from the Tokyo Stock Exchange




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    • Kim is from the University of Rhode Island. Rhee is from the Asian Development Bank on leave from the University of Rhode Island. We thank Yakov Amihud, Kee-Hong Bae, Philip Brown, Rosita Chang, Pin-Huang Chou, William Ferland, Jun-Koo Kang, Andrew Karolyi, Moon K. Kim, Gene Lai, Piman Limpaphayom, Robert Wood, Masahiro Yoshikawa, and seminar participants at the Sixth Annual Pacific-Basin Finance (PACAP) Conference (Manila), University of Rhode Island Finance Workshop, and Syracuse University Finance Workshop for their comments. We are especially grateful to René Stulz (the editor) and an anonymous referee who provided insightful suggestions and comments.


Price limit advocates claim that price limits decrease stock price volatility, counter overreaction, and do not interfere with trading activity. Conversely, price limit critics claim that price limits cause higher volatility levels on subsequent days (volatility spillover hypothesis), prevent prices from efficiently reaching their equilibrium level (delayed price discovery hypothesis), and interfere with trading due to limitations imposed by price limits (trading interference hypothesis). Empirical research does not provide conclusive support for either positions. We examine the Tokyo Stock Exchange price limit system to test these hypotheses. Our evidence supports all three hypotheses suggesting that price limits may be ineffective.