Daily Price Limits and Destructive Market Behavior

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

No 24014, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G12 G28 (search for similar items in EconPapers)
Date: 2017-11
New Economics Papers: this item is included in nep-fmk and nep-tra
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Citations: View citations in EconPapers (4)

Published as Ting Chen & Zhenyu Gao & Jibao He & Wenxi Jiang & Wei Xiong, 2018. "Daily price limits and destructive market behavior," Journal of Econometrics, .

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