Daily price limits and destructive market behavior

Ting Chen, Zhenyu Gao, Jibao He, Wenxi Jiang and Wei Xiong

Journal of Econometrics, 2019, vol. 208, issue 1, 249-264

Abstract: We use account-level data from the Shenzhen Stock Exchange to show that daily price limits, a widely adopted market stabilization mechanism, may lead to unintended, destructive market behavior: large investors tend to buy on the day when a stock hits the 10% upper price limit and then sell on the next day; and their net buying on the limit-hitting day predicts stronger long-run price reversal. We also analyze a sample of special treatment (ST) stocks, which face tighter 5% daily price limits, and provide a causal validation from comparing market dynamics before and after they are assigned the ST status.

Keywords: Price limit rule; Speculation; Investor behavior; Financial regulation (search for similar items in EconPapers)
JEL-codes: G12 G28 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (41)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:208:y:2019:i:1:p:249-264

DOI: 10.1016/j.jeconom.2018.09.014

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