Costly Arbitrage and Skewness Pricing: Evidence from First-day Price Limit Reform in China

72 Pages Posted: 24 Sep 2020 Last revised: 9 Apr 2021

See all articles by Jing Yao

Jing Yao

School of Economics, Fudan University

Zexin Zheng

Hong Kong University of Science & Technology, Department of Finance

Date Written: August 10, 2020

Abstract

We examine the impact of a reform of China's stock market that limits first-day price movements on skewness pricing. We document that the reform causes a significant increase in the impact of IPOs' expected skewness on both their initial returns and trading interference effect, especially for IPO firms that are sensitive to the limitations imposed by price limits. There is also some evidence that the skewness pricing effect persists much longer along the idiosyncratic dimension than along the market-wide dimension. The results are consistent with the notion that price limits favor delayed arbitrage, thereby positively affecting skewness pricing.

Keywords: skewness pricing; price limit; IPOs; limits to arbitrage; China

JEL Classification: G41; G11

Suggested Citation

Yao, Jing and Zheng, Zexin, Costly Arbitrage and Skewness Pricing: Evidence from First-day Price Limit Reform in China (August 10, 2020). Pacific-Basin Finance Journal, Vol. 67, 2021, Available at SSRN: https://ssrn.com/abstract=3670536 or http://dx.doi.org/10.2139/ssrn.3670536

Jing Yao (Contact Author)

School of Economics, Fudan University ( email )

600 Guoquan Road
Shanghai, Shanghai 200433
China

HOME PAGE: http://homepage.fudan.edu.cn/yaojing/

Zexin Zheng

Hong Kong University of Science & Technology, Department of Finance ( email )

Clear Water Bay, Kowloon
Hong Kong

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