Prices and Price Limits

62 Pages Posted: 1 Oct 2015 Last revised: 21 Jan 2017

See all articles by Jonathan Brogaard

Jonathan Brogaard

University of Utah - David Eccles School of Business

Kevin Roshak

University of Houston - Department of Finance

Date Written: August 1, 2016

Abstract

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

Brogaard, Jonathan and Roshak, Kevin, Prices and Price Limits (August 1, 2016). Available at SSRN: https://ssrn.com/abstract=2667104 or http://dx.doi.org/10.2139/ssrn.2667104

Jonathan Brogaard (Contact Author)

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

HOME PAGE: http://www.jonathanbrogaard.com

Kevin Roshak

University of Houston - Department of Finance ( email )

Houston, TX 77204
United States

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