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Daily price limits and destructive market behavior

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Listed:
  • Chen, Ting
  • Gao, Zhenyu
  • He, Jibao
  • Jiang, Wenxi
  • Xiong, Wei

Abstract

We use account-level data from the Shenzhen Stock Exchange to show that daily price limits, a widely adopted market stabilization mechanism, may lead to unintended, destructive market behavior: large investors tend to buy on the day when a stock hits the 10% upper price limit and then sell on the next day; and their net buying on the limit-hitting day predicts stronger long-run price reversal. We also analyze a sample of special treatment (ST) stocks, which face tighter 5% daily price limits, and provide a causal validation from comparing market dynamics before and after they are assigned the ST status.

Suggested Citation

  • Chen, Ting & Gao, Zhenyu & He, Jibao & Jiang, Wenxi & Xiong, Wei, 2019. "Daily price limits and destructive market behavior," Journal of Econometrics, Elsevier, vol. 208(1), pages 249-264.
    • Handle: RePEc:eee:econom:v:208:y:2019:i:1:p:249-264
    DOI: 10.1016/j.jeconom.2018.09.014
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    References listed on IDEAS

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    More about this item

    Keywords

    Price limit rule; Speculation; Investor behavior; Financial regulation;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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