Security Markets With Price Limits: A Bayesian Approach

Several financial markets impose daily price limits on individual securities. Once a price limit is triggered, investors observe either the limit floor or ceiling, but cannot know with certainty what the true equilibrium price would have been in the absence of such limits. The price limits in most exchanges are typically based on a percentage change from the previous day's closing price, and can be expressed as return limits. We develop a Bayesian forecasting model in the presence of return limits, assuming that security returns are governed by identically and independently shifted-exponential random variables with an unknown parameter. The unique features of our Bayesian model ate the derivations of the posterior and predictive densities. Several numerical predictions are the derivations and depicted graphically. Our main theoretical result with policy implications is that when return-limit regulations are tightened, the price-discovery process is impeded and investor's welfare is reduced.This dissertation is organized as follows:In chapter 1, we introduce the impact of price limits on security markets in some countries and the literatures on the theoretical study in this field.In chapter 2, we introduce the Portfolio theory, price limits theory and the Bayesian analysis theory.In chapter 3, we introduce the Bayesian forecasting model developed in cites which discusses the formation and the revision of expectations, assuming that the intra-day security returns are generated by independent and identical distributions contingent on an unknown parameter. Besides, it provides a two-period numerical example and derives the second-period posterior and predictive densities, assuming a shifted-exponential return generating stochastic process. Then based on its theories our paper adds a hyper-parameter to the formally ones using the multi-predictive approach to get a hyper-predictive densities. It also provides a two-period numerical example and derives the formation of expectations corresponding to.