Daily price limits and destructive market behavior

Ting CHEN, Zhenyu Gao*, Jibao He, Wenxi Jiang, Wei Xiong

*Corresponding author for this work

    Research output: Contribution to journalJournal articlepeer-review

    55 Citations (Scopus)

    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
    Pages (from-to)249-264
    Number of pages16
    JournalJournal of Econometrics
    Volume208
    Issue number1
    DOIs
    Publication statusPublished - Jan 2019

    Scopus Subject Areas

    • Economics and Econometrics

    User-Defined Keywords

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

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