Asymmetric effectiveness of price limits: evidence from a quasi-natural experiment

This study examines the effectiveness of price limits using a quasi-natural experiment in China, where ChiNext stocks’ daily price limits changed from 10 to 20%. The empirical results show asymmetric performance of the upper and lower limits. Widening the upper limit range can alleviate delayed price discovery and trading interference, whereas an equivalent lower limit can exacerbate these adverse effects. A wider upper limit range increases volatility spillovers but a wider lower-limit range does not. Such asymmetry is more pronounced when there is higher investor sentiment, a greater possibility of manipulation, and eligibility for short selling. Additional analyses suggest that widening the limit range provides investors with a greater opportunity to buy (sell) more on the upper (lower) limit hitting day and sell (buy) more on the following day, resulting in a greater order imbalance primarily caused by institutional investors. The results indicate that the daily price limit leads to market inefficiencies when the price rises but reduces stock price crashes and acts as a price stabilizer.