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Ex-post effects of circuit breakers in crisis and calm markets: Long horizon evidence from wide-band Malaysian price limits

Imtiaz Sifat (Department of Finance, Kulliyyah of Economics and Management Sciences, International Islamic University Malaysia, Kuala Lumpur, Malaysia) (Department of Economics & Finance Sunway University Business School, Sunway University, Kuala Lumpur, Malaysia)
Azhar Mohamad (Department of Finance, International Islamic University Malaysia, Kuala Lumpur, Malaysia)

Journal of Economic Studies

ISSN: 0144-3585

Article publication date: 9 March 2020

Issue publication date: 6 April 2020

171

Abstract

Purpose

Despite regulatory claims of straitening volatility and preventing crashes, evidences on circuit breakers' ability to achieve so are nonconclusive. While previous scholars studies general performances of circuit breakers, the authors examine whether Malaysian price limits aggravate volatility, impede price discovery, and interfere with trading activities in both tranquil and stressful periods.

Design/methodology/approach

The study uses a combination of parametric and nonparametric techniques consistent with Kim and Rhee (1997) to examine the major ex-post hypotheses in circuit breaker research.

Findings

For calm markets, the authors find significant success of upper limits in tempering volatility with low trading interference. Lower limits show mixed results. Conversely, in crisis markets limits fare poorly in nearly all aspects, particularly for lower limits.

Practical implications

Ramifications of the paper's findings are discussed through highlighting the asymmetric nature of price limits' ex-post effects. The paper also contributes to regulatory debate surrounding the quest for an optimal price limit.

Originality/value

The paper is the first of its kind in documenting long-horizon evidence of ex-post effects of a wide-band price limit. Moreover, the paper is unique in its approach in bifurcating circuit breaker performance along the line of market stability periods.

Keywords

Acknowledgements

The authors gratefully acknowledge the following grant: Ministry of Higher Education, Malaysia [FRGS-15-232-0473].

Citation

Sifat, I. and Mohamad, A. (2020), "Ex-post effects of circuit breakers in crisis and calm markets: Long horizon evidence from wide-band Malaysian price limits", Journal of Economic Studies, Vol. 47 No. 2, pp. 333-350. https://doi.org/10.1108/JES-06-2018-0226

Publisher

:

Emerald Publishing Limited

Copyright © 2020, Emerald Publishing Limited

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