Price-limit effectiveness: evidence from the Borsa Istanbul (BIST)

Abstract

Purpose This paper aims to analyze the impact of price-limit hits by hit type and when such hits start and stop using intraday trades and quotes at a one-second frequency for firms included in the BIST-50 index during the 13-months starting with March 2008. Like the recent COVID-19 period, this period includes the heightened stress in global financial markets in September 2008. Design/methodology/approach Using intra-day trades and quotes at a one-second frequency, the authors examine the market effects of price limits for firms included in the BIST-50 index during the global financial crisis. The authors compare the values of various metrics for 60 min centered on price-limit hit periods. The authors conduct robustness tests using auto regressive integrated moving average (ARIMA) models with trade-by-trade and with 3-min returns. Findings The findings are supportive of the following hypotheses: magnet price effects, greater informational asymmetric effects of market quality and each version of price discovery. Results are robust using samples differentiated by cross-listed status, same-day quotes instead of transaction prices and equidistant and trade-by-trade returns. Originality/value The authors use intraday data to reduce measurement error that is particularly pronounced when daily data are used to assess price limits that start and/or stop during a trading session. The authors contribute to the micro-structure literature by using ARIMA models with trade-by-trade and 3-min returns to alleviate some bias due to the autocorrelations in returns around price-limit hits in the presence of a magnet effect. The authors include some recent regulation changes in various countries to illustrate the importance of circuit breakers using price limits during COVID-19.