Can Price Limits Help When the Price is Falling? Evidence from Transactions Data on the Shanghai Stock Exchange

34 Pages Posted: 6 Feb 2008 Last revised: 26 Aug 2008

See all articles by Woon K. Wong

Woon K. Wong

IMRU, Cardiff Business School

Bo Liu

University of Electronic Science and Technology of China (UESTC)

Yong Zeng

University of Electronic Science and Technology of China (UESTC)

Date Written: 2008

Abstract

We use transactions data to explore the magnet effects of price limit rules on the Shanghai Stock Exchange (SHSE). When limit hits are imminent, stock prices are found to approach the price limits at faster rates, with higher trading intensity and larger price variation, supporting the magnet effect hypothesis of Subrahmanyam (1994). Moreover, when stock prices approach the floor limits, we observe lower than normal market conditions' trading volume and trade size but a wider spread. The panic selling psychology of individual investors for fear of illiquidity and the strategic trading decisions of discretionary traders during periods prior to price limit hits at the floors are conjectured as possible explanations for the observed price behaviors. Post-limit-hit analysis reveals evidence of delayed price discovery at the ceiling limit but price reversal at the floor.

Keywords: Price limit rules, magnet effect, delayed price discovery, transactions data, Shanghai Stock Exchange

JEL Classification: G14, G15, G18

Suggested Citation

Wong, Woon K. and Liu, Bo and Zeng, Yong, Can Price Limits Help When the Price is Falling? Evidence from Transactions Data on the Shanghai Stock Exchange (2008). China Economic Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1089855 or http://dx.doi.org/10.2139/ssrn.1089855

Woon K. Wong

IMRU, Cardiff Business School ( email )

Cardiff CF10 3EU
United Kingdom

Bo Liu

University of Electronic Science and Technology of China (UESTC) ( email )

No.4, Section 2, North Jianshe Road
Chengdu
China

Yong Zeng (Contact Author)

University of Electronic Science and Technology of China (UESTC) ( email )

No.4, Section 2, North Jianshe Road
Chengdu, Chengdu
China

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