Price Limit Effects on Stock Prices Behavior: A Contrarian Investment Strategy Approach

Subject Areas : Journal of Investment Knowledge

Hamid Reza Vakili fard ¹ , Jalal Seifoddini ² , Arash Abjadpour ³ , Hossein Maghsoud ⁴

1 - Ph.D. Faculty member of Islamic Azad University, Science and Research Branch
2 - Ph.D. Candidate in finance, Islamic Azad University, Science and Research Branch (Corresponding Author)
3 - MSc in Finance
4 - Ph.D. Candidate in finance

Received: 2012-06-09 Accepted : 2012-11-20 Published : 2012-11-20

Keywords: circuit breakers, price limit, Stock Market Volatility, contrarian investment strategy, delayed price discovery, Overreaction,

Abstract :

Price limit is a kind of circuit breaker which is used in developing stock exchanges and futures markets to prevent extreme price volatility, price manipulation, and financial crashes. Generally speaking, researchers and market participant usually disagree about price limit application, its efficiency, and optimum range. Pros believe although price limit may delay price discovery, it prevents extreme price volatility and overreaction. On the other hand, cons assert that price limit causes price volatility spillover and intensify investor’s overreaction. Since there is no consensus over the price limit application and efficiency, it is recommended to study this issue using different methods. Therefore, we are trying to study price limit effects in Tehran Stock Exchange using Contrarian Investment Strategy. Our results show that price limit application in Tehran Stock Exchange delays price discovery but has nothing to do with investor’s overreaction. Consequently, it seems that regulators have prevented extreme volatility, although this constraint delays price discovery and reduces market efficiency.