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RECONSIDERING PRICE LIMIT EFFECTIVENESS
Author(s) -
Kim Kenneth A.,
Liu Haixiao,
Yang J. Jimmy
Publication year - 2013
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/jfir.12021
Subject(s) - limit price , economics , volatility (finance) , limit (mathematics) , mid price , price discovery , price level , econometrics , monetary economics , financial economics , mathematics , mathematical analysis , futures contract
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.