Brown-bag Seminar: Daily Price Limits and Destructive Market Behavior

Research Interest
Daily price limits are widely adopted by stock markets around the world as a stabilization mechanism, although their effects remain unclear. This study takes advantage of account-level data from China to analyze the effects of 10% daily price change limits imposed on A shares traded on Shenzhen Stock Exchange. The following findings suggest that daily price limits may lead to destructive market behavior: 1) after a stock hitting the 10% upper price limit, its price continues to rise on the next day and the overall price increase partially reverses after 60 days; 2) large investors (with stock positions larger than 10 million RMB) tend to acquire a large net position on the day of hitting the upper price limit and then liquidate the position on the next day; 3) the price reversal subsequent to hitting the upper price limit is significantly correlated with the shares acquired by the large investors on the limit hitting day. We also analyze the market dynamics of a sample of ST stocks, which face lowered 5% daily price limits, by using other normal stocks as a comparison and find similar patterns to further associate the large investors’ destructive behavior with the price limits.