The Effectiveness of Price Limits and Stock Characteristics: Evidence from the Shanghai and Shenzhen Stock Exchanges

38 Pages Posted: 29 Apr 2005

See all articles by Gong-meng Chen

Gong-meng Chen

Hong Kong Polytechnic University - School of Accounting and Finance

Oliver M. Rui

China Europe International Business School (CEIBS)

Steven Shuye Wang

School of Business, Renmin University of China

Date Written: February 16, 2005

Abstract

We examine the effectiveness of price limits on Chinese A shares and investigate the characteristics of those stocks that hit their price limits more frequently. We find that the effect of price limits is asymmetric for the A shares in upward and downward price movements and different for bullish and bearish sample periods. During a bullish period price limits effectively reduce stock volatility for downward price movements, but not for upward price movements; while during a bearish period price limits effectively reduce stock volatility for upward price movements, but not for downward price movements. Second, price limits delay efficient price discovery for upward price movements, but not for downward price movements. However, we do not find evidence to suggest that price limits harmfully interfere with the stock trading processes in the Chinese A share markets. Finally, we find that actively traded stocks hit their price limits more often and tend to hit the lower limit more frequently when overall market conditions are bearish. Stocks with high book-to-market values of equity hit their upper price limits more frequently, while stocks with a high ratio of tradable shares tend to hit their price limits less frequently.

Keywords: Price limits, volatility, Chinese A shares, market sentiment, GMM

JEL Classification: G10, G14, G15

Suggested Citation

Chen, Gong-meng and Rui, Oliver M. and Wang, Steven Shuye, The Effectiveness of Price Limits and Stock Characteristics: Evidence from the Shanghai and Shenzhen Stock Exchanges (February 16, 2005). Available at SSRN: https://ssrn.com/abstract=711101 or http://dx.doi.org/10.2139/ssrn.711101

Gong-meng Chen

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon, Kowloon
Hong Kong
+852 2766 7070 (Phone)

Oliver M. Rui (Contact Author)

China Europe International Business School (CEIBS) ( email )

699 Hong Feng Road
Pudong
Shanghai 201206
China
86-21-28905618 (Phone)
86-21-28905620 (Fax)

HOME PAGE: http://https://www.ceibs.edu/rui-oliver

Steven Shuye Wang

School of Business, Renmin University of China ( email )

Beijing
China
8610-6251-8856 (Phone)

HOME PAGE: http://rbs.org.cn

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