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The Effectiveness of Price Limits and Stock Characteristics: Evidence from the Shanghai and Shenzhen Stock Exchanges

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Author Info
Gong-meng Chen ()
Oliver Rui ()
Steven Wang ()

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Abstract

We examine the effectiveness of price limits on Chinese A shares and investigate the characteristics of those stocks that hit their price limits more frequently. We find that the effect of price limits is asymmetric for the A shares in upward and downward price movements and different for bullish and bearish sample periods. During a bullish period price limits effectively reduce stock volatility for downward price movements, but not for upward price movements; while during a bearish period price limits effectively reduce stock volatility for upward price movements, but not for downward price movements. Second, price limits delay efficient price discovery for upward price movements, but not for downward price movements. However, we do not find evidence to suggest that price limits harmfully interfere with the stock trading processes in the Chinese A share markets. Finally, we find that actively traded stocks hit their price limits more often and tend to hit the lower limit more frequently when overall market conditions are bearish. Stocks with high book-to-market values of equity hit their upper price limits more frequently, while stocks with a high ratio of tradable shares tend to hit their price limits less frequently. Copyright Springer Science + Business Media, Inc. 2005

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File URL: http://hdl.handle.net/10.1007/s11156-005-4247-7
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Publisher Info
Article provided by Springer in its journal Review of Quantitative Finance and Accounting.

Volume (Year): 25 (2005)
Issue (Month): 2 (September)
Pages: 159-182
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Handle: RePEc:kap:rqfnac:v:25:y:2005:i:2:p:159-182

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Web page: http://springerlink.metapress.com/link.asp?id=102990

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Related research
Keywords: price limits; volatility; Chinese A shares; market sentiment; GMM;

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  2. Bremer, Marc & Hiraki, Takato & Sweeney, Richard J., 1997. "Predictable Patterns after Large Stock Price Changes on the Tokyo Stock Exchange," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(03), pages 345-365, September. [Downloadable!]
  3. Kim, Kenneth A. & Limpaphayom, Piman, 2000. "Characteristics of stocks that frequently hit price limits: Empirical evidence from Taiwan and Thailand," Journal of Financial Markets, Elsevier, vol. 3(3), pages 315-332, August. [Downloadable!] (restricted)
  4. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-65, June. [Downloadable!] (restricted)
  5. Grossman, S.J. & Miller, M.H., 1988. "Liquidity And Market Structure," Papers 88, Princeton, Department of Economics - Financial Research Center.
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  6. Kim, Kenneth A., 2001. "Price limits and stock market volatility," Economics Letters, Elsevier, vol. 71(1), pages 131-136, April. [Downloadable!] (restricted)
  7. Brennan, Michael J., 1986. "A theory of price limits in futures markets," Journal of Financial Economics, Elsevier, vol. 16(2), pages 213-233, June. [Downloadable!] (restricted)
  8. Banz, Rolf W., 1981. "The relationship between return and market value of common stocks," Journal of Financial Economics, Elsevier, vol. 9(1), pages 3-18, March. [Downloadable!] (restricted)
  9. Cho, David D. & Russell, Jeffrey & Tiao, George C. & Tsay, Ruey, 2003. "The magnet effect of price limits: evidence from high-frequency data on Taiwan Stock Exchange," Journal of Empirical Finance, Elsevier, vol. 10(1-2), pages 133-168, February. [Downloadable!] (restricted)
  10. Chan, K C & Chen, Nai-Fu, 1991. " Structural and Return Characteristics of Small and Large Firms," Journal of Finance, American Finance Association, vol. 46(4), pages 1467-84, September. [Downloadable!] (restricted)
  11. Wei, Steven X., 2002. "A censored-GARCH model of asset returns with price limits," Journal of Empirical Finance, Elsevier, vol. 9(2), pages 197-223, March. [Downloadable!] (restricted)
  12. Berkman, Henk & Lee, John Byong Tek, 2002. "The effectiveness of price limits in an emerging market: Evidence from the Korean Stock Exchange," Pacific-Basin Finance Journal, Elsevier, vol. 10(5), pages 517-530, November. [Downloadable!] (restricted)
  13. Chowdhry, Bhagwan & Nanda, Vikram, 1998. "Leverage and Market Stability: The Role of Margin Rules and Price Limits," Journal of Business, University of Chicago Press, vol. 71(2), pages 179-210, April. [Downloadable!] (restricted)
  14. G. Booth & John Broussard, 1998. "Setting NYSE Circuit Breaker Triggers," Journal of Financial Services Research, Springer, vol. 13(3), pages 187-204, June. [Downloadable!] (restricted)
  15. Barberis, Nicholas & Shleifer, Andrei & Vishny, Robert, 1998. "A model of investor sentiment1," Journal of Financial Economics, Elsevier, vol. 49(3), pages 307-343, September. [Downloadable!] (restricted)
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