Daily Price Limits and Destructive Market Behavior

45 Pages Posted: 13 Nov 2017

See all articles by Ting Chen

Ting Chen

Hong Kong Baptist University

Zhenyu Gao

The Chinese University of Hong Kong (CUHK) - CUHK Business School

Jibao He

Shenzhen Stock Exchange

Wenxi Jiang

CUHK Business School, The Chinese University of Hong Kong

Wei Xiong

Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: November 2017

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.

Suggested Citation

Chen, Ting and Gao, Zhenyu and He, Jibao and Jiang, Wenxi and Xiong, Wei, Daily Price Limits and Destructive Market Behavior (November 2017). NBER Working Paper No. w24014. Available at SSRN: https://ssrn.com/abstract=3070038

Ting Chen (Contact Author)

Hong Kong Baptist University ( email )

WLB 518, 34 Renfrew Road
Kowloon Tong
Hong Kong, Hong Kong NA
Hong Kong

Zhenyu Gao

The Chinese University of Hong Kong (CUHK) - CUHK Business School ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Shatin, N.T.
Hong Kong
(852)39431824 (Phone)

HOME PAGE: http://sites.google.com/site/gao515515/

Jibao He

Shenzhen Stock Exchange ( email )

2012 Shennan Blvd., Futian District
Shenzhen
China

Wenxi Jiang

CUHK Business School, The Chinese University of Hong Kong ( email )

Room 1250, Cheng Yu Tung Building
Chinese University of Hong Kong
Shatin, NT 06520
Hong Kong

Wei Xiong

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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