Widening price limit effects: evidence from an emerging stock market

This study investigates the impact of the widening of price limits on the Taiwan Stock Exchange, from 7% to 10%, by comparing the differences in performance with the different price limit levels. The empirical results show that after the event: (1) the quoted and effective spreads increased, including the components of realized spread and information asymmetry; (2) the trade-related and quote-related standard deviations and the price discovery became larger. Our outcomes indicate that the widening of price limits was disadvantageous to liquidity, but helpful for price discovery. These results imply that wider price limits are not necessarily always better than narrow price limits in every respect, but that the optimal level of price limits should be based upon the regulators’ intended goals.