Price Limits On Stock Prices In China Empirical Research

Price limits are measures worldwide adopted to stabilize securities markets. But price limits may interfere with trading activities. Many related researches have been conducted, but there has no consistent result. These studies indicate that price limits in different stock exchanges lead to different results.Since Dec. 16, 1996, price limits policy has been adopted in our country's stock markets in order to reduce the volatility and stabilize the markets. However, the effectiveness of this policy and the size of the price limits are still hot topics in both academic and commercial circles nowadays.In this paper, we first conduct a survey on current researches on price limits overseas and in China, and then we research on a comparison of the development of the price limits system in and out of China. Based on that, we use event study and group comparison methods to test three hypotheses: volatility spillover hypothesis, delayed price discovery hypothesis, and trading interference hypothesis. After that, we analyze the price limits policy in our country's stock markets and the effectiveness of this policy from statistical perspectives, and propose some useful suggestions.The main opinions in this paper are as follows: Firstly, when the price is up-limited, the volatility of the stock price needs long time to go back to the normal level. There exists volatility spillover for the up-limits, but not for the down-limits. Secondly, the up-limits hamper the stock price finding process, and control the overreaction to some degree, whereas the down-limits have no effect on price discovery process. Thirdly, the trading volume is increased several days after the price is up-limited. It prohibits the trading of the stock when it is up-limited, and causes disturbance affects on the stock markets. But the down-limits have no such effect.As a conclusion, though the price limit policy is necessary as a governmental intervening method to the stock markets, when our country's stock markets become more and more mature, the price limits should be heightened and finally be removed. Also, other methods such as trading halts should be used with the price limits policy to reduce the volatility of the stock markets, hence the efficiency of the markets can be improved.