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Journal of Emerging Market Finance, Vol. 3, No. 3, 249-267 (2004)
DOI: 10.1177/097265270400300302

Are Price Limits Priced? Evidence from the Taiwan Stock Exchange

Tony Naughton

School of Economics and Finance, Royal Melbourne Institute of Technology, Melbourne, Australia

Madhu Veeraraghavan

Department of Accounting and Finance, The University of Aukland Business School, Auckland, New Zealand, M.Veeraraghavan{at}auckland.ac.nz

In this article, a multifactor asset pricing model incorporating a price limit factor is developed to explain the cross section of asset returns following closely the mimicking portfolio methodology of Fama and French (1996). Differing regulatory environments in the Asian region suggest that empirical studies consider the features of each market. Price limits on the daily movement of stock prices are common in the emerging markets of Asia; however, research on the sensitivity of asset prices to price limits has been lacking. Prior research suggests that price limits are a significant institutional feature of the Taiwan Stock Exchange and this market is used for empirical analysis. Our findings show that the overall market factor, firm size and price limits capture the cross section of average stock returns in a meaningful manner. However, caution is needed as the relationship between excess returns, firm size and price limits remains primarily at an empirical level. Opinion also remains divided as to whether explanatory factors in addition to the market are in fact a premium for risk, or are simply associated with firm characteristics.

Key Words: CAPM • price limits • size effect • multifactor model • beta


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