1. Pin-Huang Chou Robin K. Chou Kuan-Cheng Ko National Central University
Empirical Determinants of Limit-hit Durations: Rational and Behavioral Perspectives
Pin-Huang Chou
Robin K. Chou
Kuan-Cheng Ko
National Central University

2. Introduction Definition of price limits. Pro and cons of price limits.
Cool-off period.
Market might be hurt.
The limit-hit durations.

3. Introduction
Kim and Limpaphayom (2000): determinants of limit-hit frequency.
Complements Kim and Limpaphayom (2000) in:
The impact of price-limit rule.
Rational and behavioral perspectives.
We empirically examine various determinants of limit-hit duration using censored duration models.

4. Limit-hit durations
Definition: limit-hit duration is the length of period during which the trading price is locked at a limit price.
Types of limit-hit durations:
True duration.
Left censored duration.
Right censored duration.
Two-sided censored duration.

5. Data Data source: Taiwan Economic Journal.
Sample period: January 1997 to August 2000.
The price limits are fixed at 7%.
The thirty component stocks of the Taiwan Composite Index are selected as the sample.

7. The determinants Three categories of variables are considered:
Cross-sectional determinants:
Beta and Resi-var: GMM Beta estimator and the error term from market model.
ME: the nature logarithm of the market capitalization.
Lag daily information:
Lag-ret: the daily return of previous trading day.
Lag-turn: the daily turnover of previous trading day.
Lag-pr: the daily price range of previous trading day.
Lag-sr: the daily square return of previous trading day.

8. The determinants Self-related determinants:
NHDUR: the previous non-hit duration.
PHSIGN: a dummy variable of previous hit sign.
PR: the price range between the opening of the trading day and the time of hit occurrence.
PCTO: cumulative turnover up to the time of hit occurrence.
CTO: cumulative turnover during the limit hit.
NHDUR×PHSIGN.

9. Hypotheses Does systematic risk or firm’s specific risk matter?
The sentiment effect (negative ME).
Triggered by non-fundamental, transitory shocks (negative PR).
The magnet effect (Negative PCTO).
Overreaction hypothesis (Negative CTO).

10. Econometric model Let denote the true duration, where
The censored duration model takes the regression form of , where is assumed to follow the Weibull distribution.

12. Empirical results
Negative coefficient of ME supports the sentiment effect.
Lag-ret and Lag-turn have significantly positive coefficients.
NHDUR is positive.

13. Empirical results
Negative coefficient of PR is supportive of transitory shocks.
Negative PCTO is consistent with the magnet effect.
Negative CTO indirectly supports the overreaction hypothesis.

14. Conclusion
Limit-hit durations are affected by both rational and behavioral factors.
Also, limit hits may have been triggered by magnet effect which suggests that limit hits are triggered by non-fundamental, transitory trades.