The effectiveness of competing regulatory regimes and the switching effects: Evidence from an emerging market

Hisham Farag

doi:10.1016/j.gfj.2014.06.005

The effectiveness of competing regulatory regimes and the switching effects: Evidence from an emerging market

Hisham Farag

Finance

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Abstract

I investigate the effectiveness of two competing regulatory regimes and the effect of switching from strict price limits to circuit breakers on volatility spillover, and also on trading interference hypotheses. I find that switching to the circuit breakers' regime increases volatility and disrupts the price discovery mechanism. Stock prices are prevented from reaching their equilibrium levels and traders are unable to obtain their desired positions on limits hit day. Moreover, I find that volatility is spread out over the following 2 days post-limit hits within the strict price limits regime. Finally, the results show that price limits interfere with trading activity and affect investors' beliefs and liquidity positions.

Original language	English
Pages (from-to)	136-147
Number of pages	12
Journal	Global Finance Journal
Volume	25
Issue number	2
DOIs	https://doi.org/10.1016/j.gfj.2014.06.005
Publication status	Published - 1 Jan 2014

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10.1016/j.gfj.2014.06.005

Farag_Effectiveness_competing_regulatory_regimes_Global_Finance_Journal_2014
NOTICE: this is the author’s version of a work that was accepted for publication in Global Finance Journal. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Global Finance Journal [VOL 25, ISSUE 2, 2014] DOI: 10.1016/j.gfj.2014.06.005
Accepted author manuscript, 489 KBLicence: Other (please specify with Rights Statement)

http://linkinghub.elsevier.com/retrieve/pii/S1044028314000209

Cite this

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abstract = "I investigate the effectiveness of two competing regulatory regimes and the effect of switching from strict price limits to circuit breakers on volatility spillover, and also on trading interference hypotheses. I find that switching to the circuit breakers' regime increases volatility and disrupts the price discovery mechanism. Stock prices are prevented from reaching their equilibrium levels and traders are unable to obtain their desired positions on limits hit day. Moreover, I find that volatility is spread out over the following 2 days post-limit hits within the strict price limits regime. Finally, the results show that price limits interfere with trading activity and affect investors' beliefs and liquidity positions.",

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The effectiveness of competing regulatory regimes and the switching effects: Evidence from an emerging market

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