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How price limit affects the market efficiency in a short-sale constrained market? Evidence from a quasi-natural experiment

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  • Chen, Haiqiang
  • Gu, Ming
  • Ni, Bo

Abstract

In this paper, we examine the joint effect of price limit and short-sale constraints on price discovery. Using a natural experiment in China, we show the exogenous relaxation of price limit improves price efficiency. Importantly, shortable stocks experience more improvement in price efficiency than non-shortable stocks. Event-study analysis further documents less delayed price discovery following the price-limit-hitting event on shortable stocks, which is explained by selling pressure from large institutional orders. Our findings suggest that alleviating shortsale constraints could synergize with the relaxation of trading restrictions to improve price efficiency.

Suggested Citation

  • Chen, Haiqiang & Gu, Ming & Ni, Bo, 2023. "How price limit affects the market efficiency in a short-sale constrained market? Evidence from a quasi-natural experiment," Journal of Empirical Finance, Elsevier, vol. 73(C), pages 22-39.
    • Handle: RePEc:eee:empfin:v:73:y:2023:i:c:p:22-39
    DOI: 10.1016/j.jempfin.2023.05.003
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    More about this item

    Keywords

    Price limit; Market efficiency; Short-sale constraints;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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