The Impacts of Widening the Price Limit: Information Transmission, Price Errors, and the Lead-Lag Relationship

Using the comparison of stock performance when different levels of price limits are in place, this study measures the effects of expanding the Taiwan Stock Exchange’s (TSEC) price limit from 7% to 10%. After the price limit widening event, the findings show: (1) the speed of information transmission increased considerably in the three different firm sizes (e.g., a decrease in delay by 0.0933 in large firms), (2) the errors in prices (RRD) increased considerably in the three firm sizes (Large, Medium, Small), and (3) insignificant effects of changes in the lead-lag and asymmetric effects on different-sized portfolios were detected. These findings indicate that widening the price limit leads to improved information transmission at the risk of increasing stock market risk. The order and the asymmetric effects of the spillover of information across different-sized portfolios were not changed by the event. Regulators are advised to bear in mind the trade-off of these effects when setting the optimal price limit levels.