NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Daily Price Limits and Destructive Market Behavior

Ting Chen, Zhenyu Gao, Jibao He, Wenxi Jiang, Wei Xiong

NBER Working Paper No. 24014
Issued in November 2017
NBER Program(s):AP

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.

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Document Object Identifier (DOI): 10.3386/w24014

 
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