Empirical studies on price limits and stock price volatility

Abstract

This study provides new empirical evidence related to stock market structure, market volatility and international market links, which have received much attention in financial literature since the October 1987 crash. Chapter II examines empirically the effect of price limits on stock price volatility in the Korean stock market. In doing that, it is very importnat to control for other variables besides price limits that may affect stock market provide a rare opportunity for examining the relationship between price limits and stock price volatility cross-sectionally. This study compares the return volatilities between high price limit portfolio and low price limit portfolio which are constructed on the basis of ranked price limit rates. The results show that price limits have positive effect to reduce stock price volatility. In chapter III, it is examined whether changes in market volatity induce changes in risk premiums based on international data set. This study uses long-term daily return series for the United States and Japan, and relatively short-term daily returns for European countries and the Asian NTEs. It is found that changes in market volatility affect the level of stock prices significantly from an statistical perspective, but the size of market response is trivial from an economic viewpoint in most countries. In addition, all the stock markets for ten countries do not show a significant positive relation between volatility changes and expected returns. It means that changes in risk premiuns in response to shifts in volatility are likely to be small. These findings may be explained by the mean-reverting process of market volatility shown in most countries. The last chapter in this study explores the effect of the October 1987 crash on the co-movements among national stock markets. Interrelationships among the price movements in different national stock markets are analyzed using correlation and exploratory factor analysis. The data on weekly returns ...