Effectiveness of Price Limit Hits of Japan

Abstract

The primary aim of this paper is to examine effectiveness of price limits for companies listed in the Tokyo Stock Exchange. Explanations are provided for the empirical findings and the extent to which the price limit hit regularities are related to existing stock returns regularities. We argue that if the regularities of price limit hits can be explained in the same way as the regularities of stock returns, this might mean price limit hits are not entirely due to noise trading. Results of the regularities for price limit hits show an increase of lower limit hits on March explained by tax-loss selling and an increase on upper limit hits in April explained by excess buying at the beginning of the new tax year that push stock prices to rise. These results of limit hits are consistent with the existing literature for the month-of-the-year-effect of stock returns carried out on Japan. This could indicate that such patterns of price limit hits are not all due to noise trading.