The Market Performance Of Price Limits In China

Price limits are measures worldwide adopted to stabilize securities markets. But price limits may interfere with trading activities. Many related researches haves been conducted, but there has no consistent result. These studies indicate that price limits in different stock exchanges lead to different results. The same price limits were adopted in A-and B- share markets in China. In this study, we select the stocks of the companies listed in A-and B-share at the same time as research samples, and do a concrete empirical study on effects of price limits on stock price behavior in three respects: volatility spillover, delayed price discovery and trading interference.We find that price limits make difference for A-share and B-share. Up-limits have effect on volatility of A-share return, lead to a volatility spillover. However, down-limits reduce return volatility. The empirical studies don't support the volatility spillover hypothesis for B-share. Up-limits delay the price discovery process of A-share and control the overreaction to some degree, whereas down-limits have no effect on price discovery process. For B-share, both up-limits and down-limits don't delay the price discovery, at the same time they can curb the overreaction. For A-share, up-limits lead to the trading interference. Down-limits has no effect on the liquidity of trading, as both up-limits and down-limits do for B-share.Since price-limits have different performance on A-share and B-share markets, we have noticed that the microstructure of the two markets is different. The defect regulation system, lower liquidity and higher trading cost of B-share market lead to more excessive volatility. Price limits restrain the excessive volatility of B-share, whereas up-limits affect the fundamental volatility of B-share and distort the price behavior. So we draw a conclusion that price limits are performed more efficiently in the newly stock market. Based on the above analysis and conclusion, some suggestion about how to better the price-limits and other stability measures is made at last.