International Research Journal of Finance and Economics ISSN 1450-2887 Issue 8 (2007) © EuroJournals Publishing, Inc. 2007 http://www.eurojournals.com/finance.htm
Narrow Price Limit and Stock Price Volatility: Empirical Evidence from Amman Stock Exchange
Ritab S. Al-Khouri Prof. of Finance, Faculty of Economics and Admn. Sciences Yarmouk University, Jordan E-mail: ritab_alkhouri@yahoo.com Moh’d M. Ajlouni Assistant Prof. of Finance, Faculty of Economics and Admn. Sciences Yarmouk University, Jordan E-mail: ajlouni4@yahoo.co.uk Abstract This paper empirically investigates the behaviour of daily stock return volatility around the price limit hit for a sample of 159 (189) securities listed in Amman Stock Exchange (ASE), over the years 1994(1995). More specifically, we investigate whether daily return volatility for stocks- hit price limit are expected to be lower (higher) in the post limit hit period than in the pre limit hit period, which will be consistent with the overreaction hypothesis (volatility spill over hypothesis). Our results indicate that stockshit experiences their highest level of volatility on the day when stocks-hit reach their upper daily price limits of 5% (day 0), and decreases significantly one day after the hit. Similar results are documented when stock hits reach their lower daily price limits of -5%, however with less magnitude. Results on the different sectors reveal that the banking sector experiences the highest volatility, and its volatility is the most significant during post limit hit days in comparison to the other sectors when the stocks-hit reach their upper daily price limit. However, when the stocks-hit reach its lower limit, the service sector shows the highest volatility as compared to the other sectors in the industry. Therefore, our results are more consistent with the overreaction hypothesis and that the price-limit technique is effective in reducing the volatility by providing a time-out to cool-off.
1. Introduction... [continues]
Narrow Price Limit and Stock Price Volatility: Empirical Evidence from Amman Stock Exchange
Ritab S. Al-Khouri Prof. of Finance, Faculty of Economics and Admn. Sciences Yarmouk University, Jordan E-mail: ritab_alkhouri@yahoo.com Moh’d M. Ajlouni Assistant Prof. of Finance, Faculty of Economics and Admn. Sciences Yarmouk University, Jordan E-mail: ajlouni4@yahoo.co.uk Abstract This paper empirically investigates the behaviour of daily stock return volatility around the price limit hit for a sample of 159 (189) securities listed in Amman Stock Exchange (ASE), over the years 1994(1995). More specifically, we investigate whether daily return volatility for stocks- hit price limit are expected to be lower (higher) in the post limit hit period than in the pre limit hit period, which will be consistent with the overreaction hypothesis (volatility spill over hypothesis). Our results indicate that stockshit experiences their highest level of volatility on the day when stocks-hit reach their upper daily price limits of 5% (day 0), and decreases significantly one day after the hit. Similar results are documented when stock hits reach their lower daily price limits of -5%, however with less magnitude. Results on the different sectors reveal that the banking sector experiences the highest volatility, and its volatility is the most significant during post limit hit days in comparison to the other sectors when the stocks-hit reach their upper daily price limit. However, when the stocks-hit reach its lower limit, the service sector shows the highest volatility as compared to the other sectors in the industry. Therefore, our results are more consistent with the overreaction hypothesis and that the price-limit technique is effective in reducing the volatility by providing a time-out to cool-off.
1. Introduction... [continues]
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