Working Paper: NBER ID: w24014
Authors: Ting Chen; Zhenyu Gao; Jibao He; Wenxi Jiang; Wei Xiong
Abstract: We use account-level data from the Shenzhen Stock Exchange to show that daily price limits, a widely adopted market stabilization mechanism, may lead to unintended, destructive market behavior: large investors tend to buy on the day when a stock hits the 10% upper price limit and then sell on the next day; and their net buying on the limit-hitting day predicts stronger long-run price reversal. We also analyze a sample of special treatment (ST) stocks, which face tighter 5% daily price limits, and provide a causal validation from comparing market dynamics before and after they are assigned the ST status.
Keywords: daily price limits; market behavior; large investors; price reversal; stock market
JEL Codes: G12; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| daily price limits (G13) | unintended destructive market behavior (G18) |
| large investors buying on limit-hitting days (G14) | long-run price reversals (E30) |
| tighter price limits (D41) | exacerbated destructive trading behavior (G41) |
| hitting the upper price limit (D41) | price continues rising the next day (D41) |
| hitting the upper price limit (D41) | long-run price reversal (D41) |
| st status assignment (J80) | long-run price reversal becomes more pronounced (E30) |
| large investors' trading patterns change post-st assignment (G14) | increased frequency of large positive returns above 4% (G17) |