Tail risk under price limits |
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| Institution: | 1. Konkuk University, Department of Business Administration, 120 Neungdong-ro, Gwangjin-gu, Seoul, 05029, South Korea;2. Korea Housing & Urban Guarantee Corporation, 10F, BIFC, Munhyeongeumyungro 40, Nam-gu, Busan, 48400, South Korea;1. Bank of Italy, Italy;2. Department of Economics and Management, University of Padua & CRIEP, Italy;3. Centre d''Économie de la Sorbonne, Université Paris 1 Panthéon-Sorbonne, France;4. Department of Economics and Management, University of Padua, Italy;5. Higher School of Economics, National Research University, Moscow, Russia;1. Tasmanian School of Business and Economics, University of Tasmania, Australia;2. Centre for Applied Macroeconomic Analysis, Australian National University, Australia;3. Department of Econometrics and Business Statistics, Monash University, Australia;1. Department of Finance, Fujian Business University, 19, Huang Pu, Gulou District, Fuzhou, Fujian, People''s Republic of China;2. Department of Finance, College of Economics, Jinan University, No. 601 Huangpu Avenue West, Guanzhou, Guandong 510632, People’s Republic of China;1. University of Economics in Bratislava, Slovakia;2. Masaryk University, Faculty of Economics and Administration, Brno, Czech Republic;1. Tasmanian School of Business and Economics, University of Tasmania, Hobart, TAS, 7001, Australia;2. Department of Economics, Tribhuwan University, Nepal |
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| Abstract: | This study investigates tail risk dynamics when price limits exist in stock markets, which have not been examined in the previous literature. We present the expected value of tail risk under price limits and then analyze the extent to which such limits affect Korean stock markets when they are eased gradually. The main results are threefold. First, tail risk is seriously underestimated in stock markets with a price limit system. Second, tail risk is a significant risk factor in determining asset prices if price limits are above a certain level (15%). Lastly, related to the Korean economy, tail risk has predictive power to the future stock returns when the price limit is more than 15%. In particular, tail risk has no predictive power until price limits are relaxed to 15%, implying that caution is needed when the effects of tail risk are analyzed in countries where price limits exist. |
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| Keywords: | Tail risk Price limit Systemic risk Risk price G11 G12 G17 |
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