Does the Change of Price Limit Affect the Volatility in Stock Price? – Evidence from Korea
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This paper verifies the effects of the changes in the price limit in the KOSPI market by conducting a comparative analysis on stock price’s volatility under the 15% and 30% price limit. We employ time series data for all individual stocks from January 2, 2001 to December 31, 2020. In particular, the focus of our research is to verify the Volatility Spillover Hypothesis, Delayed Price Discovery Hypothesis and Trading Interference Hypothesis. First, analysis for Volatility Spillover Hypothesis indicates that volatility spillover takes place as stocks trade at their limit price. However, after the price limit expands, the volatility spillover for stocks that previously failed to reach the limit decreases. Second, the result for the Delayed Price Discovery Hypothesis suggests that although the price spillover takes place during the trading its price limit, the price spillover for groups that have failed to reach the limit price significantly decreases after the expansion of the price limit. Lastly, the result for the Trading Interference Hypothesis indicates that after the price limit expands, the trading interference decreases as stock price reaches its price limit. In all hypotheses tested, it seems apparent that the volatility in the KOSPI market gradually decreased as a result of the expansion of the price limit.
Abstract
This paper verifies the effects of the changes in the price limit in the KOSPI market by conducting a comparative analysis on stock price’s volatility under the 15% and 30% price limit. We employ time series data for all individual stocks from January 2, 2001 to December 31, 2020. In particular, the focus of our research is to verify the Volatility Spillover Hypothesis, Delayed Price Discovery Hypothesis and Trading Interference Hypothesis. First, analysis for Volatility Spillover Hypothesis indicates that volatility spillover takes place as stocks trade at their limit price. However, after the price limit expands, the volatility spillover for stocks that previously failed to reach the limit decreases. Second, the result for the Delayed Price Discovery Hypothesis suggests that although the price spillover takes place during the trading its price limit, the price spillover for groups that have failed to reach the limit price significantly decreases after the expansion of the price limit. Lastly, the result for the Trading Interference Hypothesis indicates that after the price limit expands, the trading interference decreases as stock price reaches its price limit. In all hypotheses tested, it seems apparent that the volatility in the KOSPI market gradually decreased as a result of the expansion of the price limit.
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