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Investor sentiment and price limit rules

Author

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  • Ackert, Lucy F.
  • Huang, Yaru
  • Jiang, Lei

Abstract

This paper reports on an empirical examination of the relationship between a single-stock price limit rule and investor sentiment. While a single-stock price limit rule is new in U.S. markets, policymakers have used this tool for many years in futures markets and internationally to temper the impact of unwarranted price movements. The literature documents a significant impact of sentiment on pricing but is inconclusive regarding the efficacy of a single-stock price limit rule. We find that a price limit is more likely to be triggered when investor sentiment is extreme. Importantly, a significant portion of a price reaction to investor opinion is temporary. Thus, while some price changes reflect fundamental information, investors are prone to sentiment that moves markets based on misinformation.

Suggested Citation

  • Ackert, Lucy F. & Huang, Yaru & Jiang, Lei, 2015. "Investor sentiment and price limit rules," Journal of Behavioral and Experimental Finance, Elsevier, vol. 5(C), pages 15-26.
  • Handle: RePEc:eee:beexfi:v:5:y:2015:i:c:p:15-26
    DOI: 10.1016/j.jbef.2015.01.001
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    Citations

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    Cited by:

    1. Manhwa Wu & Paoyu Huang & Yensen Ni, 2020. "The Impact of Institutional Shareholdings on Price Limits," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 27(3), pages 343-361, September.
    2. Ackert, Lucy F. & Jiang, Lei & Lee, Hoan Soo & Liu, Jie, 2016. "Influential investors in online stock forums," International Review of Financial Analysis, Elsevier, vol. 45(C), pages 39-46.
    3. Ming-Chang Wang & Yu-Jia Ding & Pei-Han Hsin, 2018. "Order Aggressiveness and the Heating and Cooling-off Effects of Price Limits: Evidence from Taiwan Stock Exchange," Journal of Economics and Management, College of Business, Feng Chia University, Taiwan, vol. 14(2), pages 191-216, August.
    4. Seza Danışoğlu & Z. Nuray Güner, 2018. "Do price limits help control stock price volatility?," Annals of Operations Research, Springer, vol. 260(1), pages 129-157, January.

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