Friday, January 27, 2012

Stock Price Limits and ADRs

Some foreign stock markets have daily price limits. For example, in Taiwan, the daily price limit is 7%. How often do we hit these limits? The US ADR for Taiwan Semiconductor (TSM) exceeded the daily price limit ceiling 114 times and dropped below the daily price floor 47 times during a 3597 trading day period from 1997 to yesterday (using Yahoo's adjusted prices). There turns out to be a few papers on price limits and international markets.

A working paper Using American Depository Receipts to Identify the Effect of Price Limits from 2001 studies this very subject. The conclusion was that price limits simply delay price discovery without actually dampening volatility.

Another working paper The Magnet Effect of Price Limits: Evidence from High Frequency Data on Taiwan Stock Exchange shows that price limits actually accelerates price changes to the price ceiling, but not to the price floor.

Does Price Limit Affect the Autocorrelation of Stock Return Series? A Monte Carlo Experiment

Gagnon and Karolyi's Multi-Market Trading and Arbitrage studies arbitrage opportunities in ADRs specifically.

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