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In this paper, we investigate the cooling-off effect (opposite to the magneteffect) from two aspects. Firstly, from the viewpoint of dynamics, we study theexistence of the cooling-off effect by following the dynamical evolution ofsome financial variables over a period of time before the stock price hits itslimit. Secondly, from the probability perspective, we investigate, with thelogit model, the existence of the cooling-off effect through analyzing thehigh-frequency data of all A-share common stocks traded on the Shanghai StockExchange and the Shenzhen Stock Exchange from 2000 to 2011 and inspecting thetrading period from the opening phase prior to the moment that the stock pricehits its limits. A comparison is made of the properties between up-limit hitsand down-limit hits, and the possible difference will also be compared betweenbullish and bearish market state by dividing the whole period into threealternating bullish periods and three bearish periods. We find that thecooling-off effect emerges for both up-limit hits and down-limit hits, and thecooling-off effect of the down-limit hits is stronger than that of the up-limithits. The difference of the cooling-off effect between bullish period andbearish period is quite modest. Moreover, we examine the sub-optimal orderseffect, and infer that the professional individual investors and institutionalinvestors play a positive role in the cooling-off effects. All these findingsindicate that the price limit trading rule exerts a positive effect onmaintaining the stability of the Chinese stock markets.

The cooling-off effect of price limits in the Chinese stock markets