Effects of a Price limit Change on Market Stability at the Intraday Horizon in the Korean Stock Market

TL;DR

This study analyzes how a change in price limits on the Korean stock market affected intraday volatility, revealing increased low-frequency volatility components and implications for market liquidity and stability.

Contribution

It provides the first empirical analysis of the impact of price limit adjustments on intraday market volatility using Fourier analysis.

Findings

Market volatility increased after the price limit change.

Low-frequency components of price processes became more prominent.

Liquidity providers faced worse conditions post-change.

Abstract

This paper investigates the effects of a price limit change on the volatility of the Korean stock market's (KRX) intraday stock price process. Based on the most recent transaction data from the KRX, which experienced a change in the price limit on June 15, 2015, we examine the change in realized variance after the price limit change to investigate the overall effects of the change on the intraday market volatility. We then analyze the effects in more detail by applying the discrete Fourier transform (DFT) to the data set. We find evidence that the market becomes more volatile in the intraday horizon because of the increase in the amplitudes of the low-frequency components of the price processes after the price limit change. Therefore, liquidity providers are in a worse situation than they were prior to the change.