Reconsidering Price Limit Effectiveness

Most stock exchanges around the world impose daily price limits on stock prices. However, China is the only market that has experienced trading with and without price limits. We study China’s experience with price limits by comparing a subperiod with price limits to a subperiod without price limits. We provide three major sets of findings. First, we find price limits moderate transitory volatility and mitigates abnormal trading activity. Second, for poor performing stocks, a tighter price limit also appears helpful in moderating volatility and not hurtful. Finally, we find some evidence that price limits can facilitate market recovery following crashes. Many prior studies criticize price limits. Our study shows benefits of price limits.