Price limit & Evolving Capital Market Efficiency

Abstract

Emerging capital markets have limiting regulation such as price range in order to control dark impacts of market excitement and prevent extreme price volatility & market collapse. However, price range due to impose price limitation on timely reflection of information can make serial correlation and false rejection of capital market efficiency. The purpose of this paper is to evaluate weak-form capital market efficiency in Iran considering price range regulation through static & dynamic (time varying) models. Using TEPIX index time series data from 2006 to 2018 in some longer time frames (i.e. returns computed daily, weekly, and in 10-days’ time) we investigated the significance of ARMA-GARCH coefficients. The results of state space models & timeline figures of the coefficients could document capital market efficiency after eliminating (or diminishing) the impact of price limit in wide window returns. The results also explain some improvement in weak-form efficiency since 2006 along with market development degree.

Keywords

• weak-form market efficiency
• arma-garch models
• kalman filter
• informational efficiency
• price limit