| Abstract: |
Price limit trading rules are adopted in some stock markets (especially
emerging markets) trying to cool off traders' short-term trading mania on
individual stocks and increase market efficiency. Under such a microstructure,
stocks may hit their up-limits and down-limits from time to time. However, the
behaviors of price limit hits are not well studied partially due to the fact
that main stock markets such as the US markets and most European markets do
not set price limits. Here, we perform detailed analyses of the high-frequency
data of all A-share common stocks traded on the Shanghai Stock Exchange and
the Shenzhen Stock Exchange from 2000 to 2011 to investigate the statistical
properties of price limit hits and the dynamical evolution of several
important financial variables before stock price hits its limits. We compare
the properties of up-limit hits and down-limit hits. We also divide the whole
period into three bullish periods and three bearish periods to unveil possible
differences during bullish and bearish market states. To uncover the impacts
of stock capitalization on price limit hits, we partition all stocks into six
portfolios according to their capitalizations on different trading days. We
find that the price limit trading rule has a cooling-off effect (object to the
magnet effect), indicating that the rule takes effect in the Chinese stock
markets. We find that price continuation is much more likely to occur than
price reversal on the next trading day after a limit-hitting day, especially
for down-limit hits, which has potential practical values for market
practitioners. |