Daily Price Limits and Destructive Market Behavior
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.
We are grateful to seminar participants at the Chinese University of Hong Kong, Columbia University, the Shenzhen Stock Exchange, Tsinghua University, the University of Hong Kong, and the University of Maryland for helpful comments and suggestions. We especially thank Zhengjun Zhang and two anonymous referees for constructive comments. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Ting Chen & Zhenyu Gao & Jibao He & Wenxi Jiang & Wei Xiong, 2018. "Daily price limits and destructive market behavior," Journal of Econometrics, .