Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
10474950 | Journal of Economics and Business | 2005 | 30 Pages |
Abstract
Theory predicts that in exchange-rate target-zone there exists an S-shape relation between observed and theoretical prices due to the credibility and intervention assumptions. Given the similarity between price limits and exchange-rate target-zone, we demonstrate that the credibility and intervention assumptions do not necessarily hold in markets regulated by price limits. Consequently, an S-shape relation between observed and theoretical prices may not always exist because a fundamentals shock known to all traders should yield a triangle-shape relation. Our study implies that the price-limit mechanism can have no effect (under a transitory shock), be stabilizing (under a fundamentals shock and information differentiation), or slow down the price-change pace (under a fundamentals shock and information homogeneity).
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Authors
Tamir Levy, Joseph Yagil,