Price Limits and Stock Market Volatility in the Athens Stock Exchange

Price Limits and Stock Market Volatility in the Athens Stock Exchange In this paper, we have examined the effects of price limits on the stock volatility in the Athens Stock Exchange. We put forward two hypotheses, the information hypothesis, which implies that price limits only slow down the process of adjustment and have no effect on stock volatility; and the over‐reaction hypothesis, which assumes that investors tend to overreact to new information, so that price limits give them time to reassess the information and reduce stock volatility. Our results show strong support for the information hypothesis. This evidence is obtained by performing the tests on ten stocks, which include heavily traded stocks as well as less active stocks, and covering a variety of industries, and on a market wide price index. The results are also robust to the frequency of the measurement of the returns, and to the tightness of the limits. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png European Financial Management Wiley

Price Limits and Stock Market Volatility in the Athens Stock Exchange

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Publisher
Wiley
Copyright
Blackwell Publishers Ltd 1999
ISSN
1354-7798
eISSN
1468-036X
DOI
10.1111/1468-036X.00080
Publisher site
See Article on Publisher Site

Abstract

In this paper, we have examined the effects of price limits on the stock volatility in the Athens Stock Exchange. We put forward two hypotheses, the information hypothesis, which implies that price limits only slow down the process of adjustment and have no effect on stock volatility; and the over‐reaction hypothesis, which assumes that investors tend to overreact to new information, so that price limits give them time to reassess the information and reduce stock volatility. Our results show strong support for the information hypothesis. This evidence is obtained by performing the tests on ten stocks, which include heavily traded stocks as well as less active stocks, and covering a variety of industries, and on a market wide price index. The results are also robust to the frequency of the measurement of the returns, and to the tightness of the limits.

Journal

European Financial ManagementWiley

Published: Mar 1, 1999

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