Are price limits really bad for equity markets?
Date
2010
Authors
Deb, S.S.
Kalev, P.S.
Marisetty, V.B.
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Journal article
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Journal of Banking & Finance, 2010; 34(10):2462-2471
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Abstract
Despite widely documented criticisms, price-limit rules are present in many equity markets around the world. Using a game-theoretic model, we argue that, if the cost of monitoring a market is high, price-limit rules are beneficial. Empirical tests based on a cross section of 43 equity markets across five continents support our theoretical prediction. We find that the probability of the existence of price-limit rules is greater in markets that incur higher monitoring costs due to poorer business disclosure, more corruption and less efficiency in legal, regulatory and technological environments.
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Copyright 2010 Elsevier B.V.