NATIONAL BUREAU OF ECONOMIC RESEARCH
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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):Asset Pricing Program

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

Published: Ting Chen & Zhenyu Gao & Jibao He & Wenxi Jiang & Wei Xiong, 2018. "Daily price limits and destructive market behavior," Journal of Econometrics, .

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