Price Limits and Beta

Price Limits and Beta Price limits, which restrict daily price changes of a stock within a pre-specified range, make the stochastic properties of observed returns deviate from those of true returns, and hence lead to a biased estimates of the market model parameters. To investigate the impacts of price limits on the market model parameters, especially on beta, the restricted regression analysis is performed as well as the two-pass regression analysis used in examining the intervalling effect bias on beta. Empirical results suggest that, when prices are observed within a pre-specified bound, the estimates of beta using ordinary least squares substantially understate the true beta and suffer more from the intervalling effect bias. However, the delay effect of price limits on the adjustment of a security's price does not last too long, that is, remaining information is reflected on the subsequent day's stock prices very rapidly. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

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Publisher
Springer Journals
Copyright
Copyright © 1997 by Kluwer Academic Publishers
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1023/A:1008226926511
Publisher site
See Article on Publisher Site

Abstract

Price limits, which restrict daily price changes of a stock within a pre-specified range, make the stochastic properties of observed returns deviate from those of true returns, and hence lead to a biased estimates of the market model parameters. To investigate the impacts of price limits on the market model parameters, especially on beta, the restricted regression analysis is performed as well as the two-pass regression analysis used in examining the intervalling effect bias on beta. Empirical results suggest that, when prices are observed within a pre-specified bound, the estimates of beta using ordinary least squares substantially understate the true beta and suffer more from the intervalling effect bias. However, the delay effect of price limits on the adjustment of a security's price does not last too long, that is, remaining information is reflected on the subsequent day's stock prices very rapidly.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Sep 29, 2004

References

  • Limit Moves and Price Resolution: The Case of the Treasury Bond Futures Market
    Ma, C. K.; Rao, R. P.; Sears, R. S.

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