The cooling-off effect of price limits in the Chinese stock markets

Yu-Lei Wan, Gang-Jin Wang, Zhi-Qiang Jiang, Wen-Jie Xie and Wei-Xing Zhou
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Yu-Lei Wan: ECUST
Zhi-Qiang Jiang: ECUST
Wen-Jie Xie: ECUST

Papers from arXiv.org

Abstract: In this paper, we investigate the cooling-off effect (opposite to the magnet effect) from two aspects. Firstly, from the viewpoint of dynamics, we study the existence of the cooling-off effect by following the dynamical evolution of some financial variables over a period of time before the stock price hits its limit. Secondly, from the probability perspective, we investigate, with the logit model, the existence of the cooling-off effect through analyzing the high-frequency data of all A-share common stocks traded on the Shanghai Stock Exchange and the Shenzhen Stock Exchange from 2000 to 2011 and inspecting the trading period from the opening phase prior to the moment that the stock price hits its limits. A comparison is made of the properties between up-limit hits and down-limit hits, and the possible difference will also be compared between bullish and bearish market state by dividing the whole period into three alternating bullish periods and three bearish periods. We find that the cooling-off effect emerges for both up-limit hits and down-limit hits, and the cooling-off effect of the down-limit hits is stronger than that of the up-limit hits. The difference of the cooling-off effect between bullish period and bearish period is quite modest. Moreover, we examine the sub-optimal orders effect, and infer that the professional individual investors and institutional investors play a positive role in the cooling-off effects. All these findings indicate that the price limit trading rule exerts a positive effect on maintaining the stability of the Chinese stock markets.

Date: 2018-03
New Economics Papers: this item is included in nep-mst and nep-tra
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Citations: View citations in EconPapers (5)

Published in Physica A 505, 153-163 (2018)

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Journal Article: The cooling-off effect of price limits in the Chinese stock markets (2018)
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