Effect Analysis of Price Limit Regulation on the Efficiency of Tehran Stock Exchange

Price range limit law is a supportive policy which is applied in stock exchanges with the aim of investment risk reduction. Its advocates believe that applying this law reduces stocks price volatility and prevents shareholders excessive reaction. On the other hand, opponents believe that price range limit law increases the volatility in the coming days and decreases stock market efficiency by preventing the stock price to reach quickly to the equilibrium level. By analyzing the auto-correlation pattern of total efficiency parameter in Tehran Stock Exchange, this paper has studied the impact of price range limit law on the efficiency of Tehran Stock Exchange by two aspects: (1) delay in reaching the real price (2) its impact on investors over reaction. Due to auto-correlation diagrams, daily efficiencies have positive auto-correlation both before and after applying this law that shows slow process of information dissemination and news reflection in the market and consequently nonefficient market. Data positive auto-correlation surely goes away sooner before applying this law and efficiencies have negative auto-correlation at longer intervals. Considering that Tehran Stock Exchange is less developed than other world great exchanges, slow rate of information flow and lack of rapid response of all investors to the news can be two important factors for creating the positive auto-correlation in the stock efficiency. Statistical tests show that price range limit law has transferred more price changes to coming days by causing delay in reaching the stock to its equilibrium level. So, this law has intensified auto-correlation of positive efficiencies and therefore decreased market efficiency by slowing the reflection process of news on the stock price. In addition, there has been no significant evidence concerning the impact of this law on investors over reaction (increase or reduction).We are also witness of drop in efficiency status at Tehran Stock Exchange after applying price range limit law according to the modeling results of variation in efficiency status by using model composition with variable parameters over time with a GARCH-M model for considering non similarity of conditional variance.