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Price Limits and Stock Market Volatility in the Athens Stock Exchange

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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.
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Keywords: ARCH/GARCH modelling; Athens Stock Exchange.; emerging capital markets; price limits and volatility

Document Type: Research Article

Affiliations: 1: City University Business School, Frobisher Crescent, Barbican Centre, London EC2Y 8HB, UK, e-mail: K.Phylaktis┬ę 2: City University Business School, London, UK 3: National Bank of Greece, Athens, Greece

Publication date: March 1, 1999

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