Daily price limits and destructive market behavior

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

Research output: Contribution to journalArticle

10 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 languageEnglish (US)
Pages (from-to)249-264
Number of pages16
JournalJournal of Econometrics
Volume208
Issue number1
DOIs
StatePublished - Jan 2019

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

Keywords

  • Financial regulation
  • Investor behavior
  • Price limit rule
  • Speculation

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