A0626
Title: Daily price limits and destructive market behavior
Authors: Wenxi Jiang - Chinese University of Hong Kong (Hong Kong) [presenting]
Abstract: Account-level data from the Shenzhen Stock Exchange is considered to analyze the effects of daily price limits, a widely adopted market stabilization mechanism across the world. The following findings suggest that daily price limits may lead to unintended, destructive market behavior: 1) after a stock hits the 10\% upper price limit, its price continues to rise on the next day and the price increase reverses in the long run; 2) large investors tend to buy on the day of the upper price limit being hit and then sell on the next day; and 3) large investors' net buying on the limit-hitting day significantly 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 officially assigned the ST status.
