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

^*Corresponding author for this work

Research output: Contribution to journal › Journal article › peer-review

67 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 language	English
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
Publication status	Published - Jan 2019

Scopus Subject Areas

Economics and Econometrics

User-Defined Keywords

Financial regulation
Investor behavior
Price limit rule
Speculation

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

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10.1016/j.jeconom.2018.09.014

Cite this

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title = "Daily price limits and destructive market behavior",

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.",

keywords = "Financial regulation, Investor behavior, Price limit rule, Speculation",

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

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T1 - Daily price limits and destructive market behavior

AU - Chen, Ting

AU - Gao, Zhenyu

AU - He, Jibao

AU - Jiang, Wenxi

AU - Xiong, Wei

PY - 2019/1

Y1 - 2019/1

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

UR - http://www.scopus.com/inward/record.url?scp=85055025886&partnerID=8YFLogxK

U2 - 10.1016/j.jeconom.2018.09.014

DO - 10.1016/j.jeconom.2018.09.014

M3 - Journal article

AN - SCOPUS:85055025886

SN - 0304-4076

VL - 208

SP - 249

EP - 264

JO - Journal of Econometrics

JF - Journal of Econometrics

IS - 1

ER -

Daily price limits and destructive market behavior

Abstract

Scopus Subject Areas

User-Defined Keywords

UN SDGs

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