Do price limits help control stock price volatility

On the negative side, price limits are criticized for increasing stock price volatilityand hindering the price discovery process. On the positive side, price limits are arguedto give panicky investors additional time to reassess their judgments and thus provide anopportunity for correcting the element of overreaction in pricing stocks. This study analyzesthe effectiveness of price limits in Borsa Istanbul by utilizing a propensity-matched controlsample in addition to the traditional benchmarks used in the literature. Similar to recentresearch, we find strong evidence that price limits lead to increased and persistent pricevolatility and decreased liquidity. We also provide evidence that price limits interfere withthe price discovery process. Results show that smaller stocks with larger volatility and highertrading volume are more likely to experience limit hits. Furthermore, the difference in thefindings from the matched control sample and the traditional benchmarks points out theimportance of accounting for firm- and market-related characteristics when analyzing theeffect of price limits