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Price bands and their effects on equity markets: Evidence from a natural experiment

Author

Listed:
  • Gatchev, Vladimir A.
  • Seth, Rama
  • Singh, Ajai
  • Vishwanatha, S.R.

Abstract

We exploit a unique experiment, where the intraday price moves of Indian IPO listings are restricted within a narrow band, to examine the consequences of price bands for stock prices, investor trading behavior, and stock market liquidity. Based on difference-in-differences estimations, we find that price bands lead to a significant reduction in the price variability of IPO stocks. The decrease in variability is accompanied by increases in post-IPO selling by individual investors, the price impact of trades, and IPO expected returns. Bid-ask spreads remain similar. The findings provide new evidence on the effects of intraday price bands on equity markets.

Suggested Citation

  • Gatchev, Vladimir A. & Seth, Rama & Singh, Ajai & Vishwanatha, S.R., 2023. "Price bands and their effects on equity markets: Evidence from a natural experiment," Journal of Financial Markets, Elsevier, vol. 66(C).
    • Handle: RePEc:eee:finmar:v:66:y:2023:i:c:s1386418123000381
    DOI: 10.1016/j.finmar.2023.100840
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    More about this item

    Keywords

    Price limits; Stock market liquidity; Investor trading behavior; Asset prices; IPOs;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G40 - Financial Economics - - Behavioral Finance - - - General

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