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

WONG, Woon K.; LIU, Bo; ZENG, Yong

Authors

Woon K. WONG

Bo LIU

Yong ZENG



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 floor. © 2008 Elsevier Inc. All rights reserved.

Citation

WONG, W. K., LIU, B., & 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), 91-102. https://doi.org/10.1016/j.chieco.2008.09.002

Journal Article Type Article
Publication Date Mar 1, 2009
Journal China Economic Review
Print ISSN 1043-951X
Publisher Elsevier
Peer Reviewed Not Peer Reviewed
Volume 20
Issue 1
Pages 91-102
DOI https://doi.org/10.1016/j.chieco.2008.09.002
Keywords price limit rules, magnet effect, delayed price discovery, transactions data, Shanghai stock exchange
Public URL https://uwe-repository.worktribe.com/output/998540
Publisher URL http://dx.doi.org/10.1016/j.chieco.2008.09.002




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