Can price limits help when the price is falling? Evidence from transactions data on the Shanghai Stock Exchange

Wong, W. K., Liu, B. and Zeng, Y. (2009) Can price limits help when the price is falling? Evidence from transactions data on the Shanghai Stock Exchange. China Economic Review, 20 (1). pp. 91-102. ISSN 1043-951X

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Publisher's URL: http://dx.doi.org/10.1016/j.chieco.2008.09.002

Abstract

We use transactions data to explore the magnet effects of price limit rules on the Shanghai Stock Exchange (SHSE). When limit hits are imminent, stock prices are found to approach the price limits at faster rates, with higher trading intensity and larger price variation, supporting the magnet effect hypothesis of Subrahmanyam [Subrahmanyam, A., 1994. Circuit breakers and market volatility: A theoretical perspective. Journal of Finance, 49, 237–254.]. Moreover, when stock prices approach the floor limits, we observe lower than normal market conditions’ trading volume and trade size but a wider spread. The panic selling psychology of individual investors for fear of illiquidity and the strategic trading decisions of discretionary traders during periods prior to price limit hits at the floors are conjectured as possible explanations for the observed price behaviors. Post-limit-hit analysis reveals evidence of delayed price discovery at the ceiling limit but price reversal at the fl

Item Type:Article
Uncontrolled Keywords:price limit rules, magnet effect, delayed price discovery, transactions data, Shanghai stock exchange
Faculty/Department:Faculty of Business and Law > Department of Business Management
ID Code:12172
Deposited By: Dr W. Wong
Deposited On:06 Jan 2011 11:25
Last Modified:12 Aug 2013 08:03

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