Event study methodology and regulatory changes: the case of price limits in Taiwan's stock market

Abstract

Event studies mainly investigate the relationship between asset returns and specific economic phenomena. However, previous event studies appeared to focus only on firm and industry-specific events, whereas researches for analyzing the impact of market wide events on asset returns seem scarce. Of various market-wide events, the enactment and revision of regulations are often discussed. Basically, regulations are often enacted in the intent to reduce or to minimize the total social costs as well as private costs. Similarly, it is the same intent that ROC government set up price limits for stock trading in Taiwan's stock market. Recently, more and more attentions have been paid on this regulation, especially after the global stock crash of 1987. Some studies have suggested that price limit may be an alternative to restrain the capital market from overreaction to anticipated and/or unanticipated economic information [Chiang & Wu (1989)]. Nonetheless, its effectiveness is also questioned, for it is also argued that the imposition of such restrictions will induce several barriers on trading.