Impact of price limits on Taiwan security returns

The paper investigates the effects of daily price limits imposed by the R.O.C. Government on shares listed on the Taiwan Stock Exchange. The study is performed on nineteen blue-chip stocks from six industries. For each sample stock, the daily returns (from 4 January 1986 to 24 October 1987) are divided into three groups: (A) first experimental, (B) second experimental and (C) control groups. Each sample point in groups A and B consists of one event day and the following six trading days. Event day is defined to be the day the stock price reaches the upper (lower) price limit. Group C comprises all other days, except ex-dividend days. Group C data are used in the market model to obtain the alpha and beta estimates for that stock. These estimates are then used to (CARs) embedded in data sets A and B. The preliminary results of this research suggest severe violation of the random walk hypothesis. Further, the impact of government imposed price limits on stocks varies across stocks. While several patterns of CARs of stock return are observed, the results suggest existence of potential profitable short-run investment strategies among several sample stocks in this study.We are most grateful to the National Science Council of Taiwan and National Chiao-Tung University for providing the data set, SPIT. This paper has benefitted from the discussion in the conference.