Daily price limits and destructive market behavior

Ting Chen; Zhenyu Gao; Jibao He; Wenxi Jiang; Wei Xiong

doi:10.1016/j.jeconom.2018.09.014

Daily price limits and destructive market behavior

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

Research output: Contribution to journal › Article › peer-review

72 Scopus citations

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.

Original language	English (US)
Pages (from-to)	249-264
Number of pages	16
Journal	Journal of Econometrics
Volume	208
Issue number	1
DOIs	https://doi.org/10.1016/j.jeconom.2018.09.014
State	Published - Jan 2019

All Science Journal Classification (ASJC) codes

Economics and Econometrics

Keywords

Financial regulation
Investor behavior
Price limit rule
Speculation

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10.1016/j.jeconom.2018.09.014

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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.",

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AU - Chen, Ting

AU - Gao, Zhenyu

AU - He, Jibao

AU - Jiang, Wenxi

AU - Xiong, Wei

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N2 - 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.

AB - 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.

KW - Financial regulation

KW - Investor behavior

KW - Price limit rule

KW - Speculation

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Daily price limits and destructive market behavior

Abstract

All Science Journal Classification (ASJC) codes

Keywords

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