The Effectiveness of Price Limits and Stock Characteristics: Evidence from the Shanghai and Shenzhen Stock Exchanges

The Effectiveness of Price Limits and Stock Characteristics: Evidence from the Shanghai and... We examine the effectiveness of price limits on Chinese A shares and investigate the characteristics of those stocks that hit their price limits more frequently. We find that the effect of price limits is asymmetric for the A shares in upward and downward price movements and different for bullish and bearish sample periods. During a bullish period price limits effectively reduce stock volatility for downward price movements, but not for upward price movements; while during a bearish period price limits effectively reduce stock volatility for upward price movements, but not for downward price movements. Second, price limits delay efficient price discovery for upward price movements, but not for downward price movements. However, we do not find evidence to suggest that price limits harmfully interfere with the stock trading processes in the Chinese A share markets. Finally, we find that actively traded stocks hit their price limits more often and tend to hit the lower limit more frequently when overall market conditions are bearish. Stocks with high book-to-market values of equity hit their upper price limits more frequently, while stocks with a high ratio of tradable shares tend to hit their price limits less frequently. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

The Effectiveness of Price Limits and Stock Characteristics: Evidence from the Shanghai and Shenzhen Stock Exchanges

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Publisher
Springer Journals
Copyright
Copyright © 2005 by Springer Science + Business Media, Inc.
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-005-4247-7
Publisher site
See Article on Publisher Site

Abstract

We examine the effectiveness of price limits on Chinese A shares and investigate the characteristics of those stocks that hit their price limits more frequently. We find that the effect of price limits is asymmetric for the A shares in upward and downward price movements and different for bullish and bearish sample periods. During a bullish period price limits effectively reduce stock volatility for downward price movements, but not for upward price movements; while during a bearish period price limits effectively reduce stock volatility for upward price movements, but not for downward price movements. Second, price limits delay efficient price discovery for upward price movements, but not for downward price movements. However, we do not find evidence to suggest that price limits harmfully interfere with the stock trading processes in the Chinese A share markets. Finally, we find that actively traded stocks hit their price limits more often and tend to hit the lower limit more frequently when overall market conditions are bearish. Stocks with high book-to-market values of equity hit their upper price limits more frequently, while stocks with a high ratio of tradable shares tend to hit their price limits less frequently.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Jan 1, 2005

References

  • Do Daily Price Limits Act as Magnets? The Case of Treasury Bond Futures
    Arak, M.; Cook, R.
  • A Model of Investor Sentiment
    Barberis, N.; Shleifer, A.; Vishny, R.
  • Setting NYSE Circuit Breaker Triggers
    Booth, G. G.; Broussard, J. P.
  • Structural and Return Characteristics of Small and Large Firms
    Chan, K. C.; Chen, N. F.
  • Further Evidence on Investor Overreaction and Stock Market Seasonality
    De Bondt, W. F. M.; Thaler, R.

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