RECONSIDERING PRICE LIMIT EFFECTIVENESS

Authors


  • We thank the journal's editors, associate editor (Kumar Venkataraman), and anonymous referee for their overall handling, overseeing, and reviewing of our paper. We also thank Haiwei Chen, Pin-Huang Chou, Yong Kim, Haithan Nobanee, Roberto Pascual, David Reiffen; seminar participants at the University of New South Wales, University of Sydney, National Sun Yat-Sen University, National Chung-Hsing University, National Kaohsiung First University of Science and Technology; and session participants at the 2011 Asian Finance Association and 2011 Financial Management Association meetings for comments and suggestions on earlier versions of this paper. We also thank Shane Corwin for answering our questions on estimating spreads using daily data. Kim gratefully acknowledges the PACAP Research Center (in particular, Shaw Chen and Tong Yu) for generously providing data and technical support. The usual disclaimer applies.

Abstract

We study China's experience with price limits by comparing a period with price limits to a period without price limits. Although many prior studies document costs of price limits, we show benefits of price limits. We find that price limits can facilitate price discovery, moderate transitory volatility, and mitigate abnormal trading activity. A tighter price limit for poorly performing stocks can also moderate volatility. We do not find evidence of a magnet effect, which suggests that prices gravitate to limit prices. Finally, we find evidence that price limits can facilitate market recovery following crashes.

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