گروههای محدود قیمت، نوسانات نامتقارن و ناهنجاریهای بازار سهام : شواهد حاصل از بازارهای نوظهور

I investigate the effects of imposing different bands of price limits on stock returns and volatility in the Egyptian (EGX), Thai (SET) and Korean (KRX) stock exchanges. In addition, the paper examines whether the switch from narrow price limits (NPL) to wider price limits (WPL) structurally alters volatility and the day of the week anomaly. Using the extended EGARCH and PARCH asymmetric volatility models, I found that the switch from NPL to WPL structurally altered both asymmetric volatility and the day of the week anomaly in the EGX, SET and KRX. I argue that the price discovery mechanism is disrupted due to the switch as closing prices do not fully reflect all information arrived in the market when prices hit the limits and that is reflected on volatility and market efficiency.

Price limits are regulatory tools in both equity and futures markets in which further trading is prevented for a period of time with the intention of cooling market traders' emotions and reducing price volatility.1 The trigger for such limits is when prices hit particular pre-specified price boundaries.2 The proponents of price limits argue that they are efficient in reducing price volatility and providing time for both brokers and investors to adjust their portfolio positions. However, the opponents claim that these regulatory tools are useless as they lead to spreading out price volatility over a longer time, delaying price discovery, and interfering with trading activity. See for example; Santoni and Liu (1993), Subrahmanyam (1994), Kim and Rhee (1997), Phylaktis, Kavussanos, and Manalis (1999), Lee and Chung (1996) and Ryoo and Smith (2002). The efficient market hypotheses (EMH) state that stock prices should reflect all information disseminated in the market, so that price limits or any other regulatory policies may have a negative impact on stock markets (trading interference and volatility spillover hypotheses). In addition, imposing these regulatory polices implies a degree of market inefficiency and a clear violation of the semi-strong efficient market hypothesis, as price limits prevent stock prices from reaching their equilibrium levels (Kim & Rhee, 1997). Lee and Chung (1996) and Ryoo and Smith (2002) argue that price limits result in clear violation of the weak form market efficiency hypothesis as information is not fully reflected in closing prices when prices hit the limits in the Korean stock market. The existing body of the literature documents that price limits have three main effects namely volatility spillover, delayed price discovery mechanism and trading interference (Kim and Rhee, 1997). Lehmann (1989), Kim and Rhee (1997), and Lee, Ready, and Seguin (1994) among others argue that price limits interfere with the price discovery mechanism as imposing limits prevents prices from reaching their equilibrium levels and cause price volatility to spread out over the subsequent trading days following limits hit. On the other hand, emerging stock markets are known to be more volatile and less efficient than well established markets. In particular, thinly trading markets are likely to be more risky and therefore the effect of shocks is greater than in larger, established markets. The existing body of literature on price limits investigates narrow price limits in many stock exchanges i.e. Tokyo and Athens Stock Exchanges (Kim and Rhee, 1997 and Phylaktis et al., 1999). The empirical findings of these papers are mixed, therefore we cannot really decide whether narrow price limits decrease volatility and cool down the market. A question therefore arises as to whether price limits do in fact reduce price volatility, and secondly, do price limit regimes structurally alter daily stock returns and volatility. Finally, is there a relationship between these regulatory policies and stock market anomalies such as the day of the week phenomenon? There are a few stock exchanges over the world that have experienced a transition from narrow price limit to a combination of wider price limits and trading halts. However, there are no other studies – to the best of my knowledge – that have empirically investigated the relative efficiency of the alternative price limit regimes and the potential effect on stock market anomalies such as the day of the week effect. I try to fill this gap by using data from the Egyptian stock exchange (EGX), stock exchange of Thailand (SET) and Korean stock exchange (KRX). This paper then has two main objectives; firstly, it investigates the effects of imposing different bands of price limits on stock returns, volatility and the day of the week anomaly in the EGX, SET and KRX. Secondly, the paper examines whether the switch from narrow price limits (NPL) to wider price limits (WPL) structurally alters daily stock returns, volatility and the day of the week anomaly. Using the extended EGARCH and PARCH time varying conditional variance models, I find that daily stock returns in EGX, SET and KOSPI are characterised by EGARCH and PARCH asymmetric volatility models with a generalised error distribution. Volatility persistence and clustering are highly significant for the three indices. I also found that negative shocks (bad news) have greater impact on conditional volatility compared with positive shocks (good news) for EGX30, SET and KOSPI. Thursday and Friday have positive and highly significant impact on returns for the SET and EGX30 respectively. However and consistent with the literature, Monday effect is reported in the SET. Results also show that there is no day of the week effect on returns in the KRX. Results suggest that the switch from narrow price limits (NPL) to wider price limits (WPL) structurally affects both asymmetric volatility and the day of the week anomaly in the Egyptian, Thai and Korean stock exchanges. Finally, The Power ARCH parameters are highly significant and their size is bigger within WPL windows. This suggests that the switch from NPL to WPL has significant and positive impact on conditional volatility of EGX30, SET and KOSPI market indices. The paper has clear policy implications for the regulators in emerging markets as it investigates whether narrow or wider bands of price limits leads to more stock price stability and cool down emerging market volatility. Moreover as the paper links between the different regulatory policies and the day-of-the-week anomaly, it highlights potential causes of market inefficiency. The rest of the paper is organised as follows. Section 2 presents the literature survey and hypotheses development. Section 3 provides a brief background of the price limit regimes in EGX, SET and KRX. Section 4 describes the dataset. 5 and 6 present details of the econometric modelling and the empirical results respectively. A conclusion is presented in a final section.

The main objective of this paper is to investigate the effects of imposing different bands of price limits on stock returns and asymmetric volatility in EGX, SET and KRX. Secondly, the paper examines whether the switch from narrow price limits (NPL) to wider price limits (WPL) structurally alters asymmetric volatility and the day of the week anomaly. Using daily data of the EGX30, SET and KOSPI market indices, our results suggest that the switch from symmetric narrow price limits (NPL) to wider price limits (WPL) structurally affects stock returns, asymmetric volatility and the day of the week anomaly in both the Egyptian and Thai stock markets. Using the extended EGARCH and PARCH asymmetric volatility models I find that Thursday and Friday have positive and highly significant impact on returns for the EGX30 and SET respectively. However and consistent with the literature, Monday effect is observed for the SET. Results also show that there is no day of the week effect on returns in the KRX. On the other hand, the estimated conditional variance suggests that, daily stock returns are characterised by EGARCH and PARCH asymmetric volatility models with a generalised error distribution. The results of the regime change show that the switch from NPL to WPL has significant and positive impact on conditional volatility of EGX30, SET and KOSPI market indices. In addition, the day of the week phenomenon is structurally altered due to the switch. I argue that the delayed price discovery hypothesis of Lehmann (1989), Lee et al. (1994) and Kim and Rhee (1997) may explain the above results; price limits prevent stock prices from reaching to their equilibrium levels as price limits disrupt trading mechanism and thus closing prices do not reflect the full information arrived in the market during the trading session (Farag and Cressy, 2012 and Lee and Chung, 1996). Therefore price limits influence market efficiency and this explains the structural changes in volatility and the day of the week phenomenon between the two regimes. In both EGX and SET the WPL regime is combined with a trading halt in which investors are allowed to adjust their portfolio positions. However, due to the lack of informational efficiency and the role of noise trading in emerging markets stock prices post halt period are likely to be much noisier and significantly different from equilibrium levels. Therefore higher volatility is expected when trading is resumed (Farag and Cressy, 2012; Lee et al., 1994 and Tetlock, 2007). On the other hand, within NPL regime, trading is suspended until the end of the trading session when prices hit the limits, therefore, volatility is likely to spread out over subsequent trading days (volatility spillover hypothesis of Kim and Rhee (1997)) and thus lower volatility is expected within NPL. I argue that the price discovery mechanism differs between the two regimes and that is reflected on volatility and the informational efficiency. To conclude, switching from narrow price limits to wider limit bands increases volatility, disrupts trading mechanism and structurally alters the day of the week anomaly in the Egyptian, Thai and Korean stock exchanges.