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Tail Risk under Price Limits

  • Sekyung Oh Konkuk University, Department of Business Administration
  • KinamPark Korea Asset Pricing Co., Samhwan Bldg.
  • Hyukdo Kee Konkuk University, Department of Business Administration
The goal of this paper is to investigate the dynamics of tail risk when the price limits exist in the stock markets. We present the expected value of tail risk under the price limits based on which we analyze the effect of the price limits on tail risk for the Korean stock markets where the price limits exist and are eased gradually. The main results are: First, tail risk is seriously underestimated in the stock markets with a price limit system. In particular, tail risk cannot be used as a meaningful risk indicator if the price limits are less than 15%. Second, tail risk is highly predictive of stock returns in the Korean stock markets if the price limits are higher than 15%. Third, tail risk is a significant risk factor in determining asset price if the price limits are higher than 15%. Lastly, tail risk has the predictive power from 6 to 12 months in advance as a systemic risk indicator related to the Korean economy if the price limits are higher than 15%.

  • Sekyung Oh
  • KinamPark
  • Hyukdo Kee
The goal of this paper is to investigate the dynamics of tail risk when the price limits exist in the stock markets. We present the expected value of tail risk under the price limits based on which we analyze the effect of the price limits on tail risk for the Korean stock markets where the price limits exist and are eased gradually. The main results are: First, tail risk is seriously underestimated in the stock markets with a price limit system. In particular, tail risk cannot be used as a meaningful risk indicator if the price limits are less than 15%. Second, tail risk is highly predictive of stock returns in the Korean stock markets if the price limits are higher than 15%. Third, tail risk is a significant risk factor in determining asset price if the price limits are higher than 15%. Lastly, tail risk has the predictive power from 6 to 12 months in advance as a systemic risk indicator related to the Korean economy if the price limits are higher than 15%.
tail risk,price limit,systemic risk,risk price