Prices and Price Limits
62 Pages Posted: 1 Oct 2015 Last revised: 21 Jan 2017
Date Written: August 1, 2016
This paper studies the effects of price limits implemented by the Securities and Exchange Commission (SEC) after the May 2010 ‘Flash Crash.’ The security-level price limits halt trading after a security’s price experiences a sudden and large movement. The difference-in-difference design exploits the staggered introduction of the limits to address omitted variable concerns. The data show that price limits reduce the frequency and severity of extreme price movements, but induce price underreaction. The results are consistent with Subrahmanyam’s (1997) theory that price limits cause informed traders to be less aggressive.
Keywords: Circuit Breakers, Price Limits, Extreme Price Movements, Market Regulation
JEL Classification: G12, G14, G28
Suggested Citation: Suggested Citation