The Effect of Daily Stock Price Limits on the Investment Risk: Evidence from the Egyptian Stock Market

Abstract

The study aims to investigate the relationship between daily price limits and stock volatility, trading volume, delayed adjustment of stock prices, and its fair value. To achieve this goal, we used the data of the listed firms in EGX30. We analyzed the data using descriptive analysis then we applied General linear model, ARCH and GARCH models. Based on our analysis results show a positive relationship between upper daily limit and stock volatility, a positive relationship between daily price limits (upper limit-lower limit) and trading volume, a positive relationship between upper daily limit and the return between the closing price and the opening price on the same day, a positive relationship between lower daily limit and the return between the closing price and the opening price in the next day, a negative relationship between upper daily limit and the return between the closing price and the opening price in the next day, and a positive relationship between daily stock price limits and the fair value.

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“…Price restrictions do not affect movements (Li et al, 2014). Chen et al ( 2014), Abdelzaher and Elgiziry (2017), Danışoğlu and Güner (2018), Rillo (2018), Tao et al (2017), Kristiana et al (2021), Goh et al (2021), Abu-lila (2021), Purwono et al (2018) and Aktas et al (2020) did not agree with price limit. It was assumed that the limits system causes an increase in high price volatility after the stock reaches the limit (volatility spillover hypothesis).…”

“…Furthermore, price limits are intended to provide opportunities for investors to obtain good information, hence creating rational decisions in the capital market. Daily stock price limit related to stock return volatility (Abdelzaher & Elgiziry, 2017;Sayed & Auret, 2018;Li et al, 2014;Upadhyaya et al, 2020;Thuy & Thuy, 2019;Soleymani et al, 2017;Siddiqui, 2016;Herwany et al, 2021) stated that limit regulations are not effective in dealing with volatility levels. According to Zhang et al (2016), it was shown that the regulation of price limits increases volatility.…”

“…Furthermore, existence of daily stock price limits can reduce the level of price volatility by minimizing over-reaction of investors towards the market. Also, proponents of the price limits system claimed that as long as this system were implemented in 1987, there might not be a capital market crisis in October 1987 (Abdelzaher & Elgiziry, 2017;Asuamah & Ohene-Manu, 2015;Hatta et al, 2018). Several Asia-Pacific financial markets have imposed price caps to reduce excessive fluctuations.…”