The Effectiveness of Price Limit Imposed on Stock Market in Mainland China
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Publisher:The Ohio State University
Series/Report no.:The Ohio State University. Department of Finance Undergraduate Research Theses; 2014
According to stock exchange regulations in Mainland China, in order to mitigate excessive volatility and protect ordinary investors from market manipulation, the price of any stock cannot change by more than 10 percent from its previous day’s closing price on any given trading day. Although the price limit regulation exists in a substantial number of financial markets around the world and has attracted much attention from government regulators, industrial practitioners, and academic researchers, the existing literature is limited. In consideration of inconclusive arguments and out-of-date samples in previous research about emerging markets, it is necessary to reconsider the effectiveness of price limit with more recent data through an insightful approach. The purpose of this study is to show that price limit in the Chinese stock markets is ineffective to some extent, in that they cannot successfully mitigate market volatility or provide higher returns to investors. In order to better understand the effects of price limit, this study utilizes historical stock price data in the Chinese stock markets over 20 years, which includes both periods with and without the price limit regulation. The fundamental idea of this study is to analyze volatilities and returns of different periods, based on overall market, various industries, various market caps, and selective sample stocks. The empirical results in the research show that price limit regulation works under certain circumstances while fails to mitigate volatilities or provide higher returns in most cases. The findings exactly match the hypothesis and indicate ineffectiveness of price limit regulation. In conclusion, this study could be used as empirical evidence for implementing appropriate stock market regulations, and promoting stock market microstructural reforms, especially for emerging markets.
Honorable mention at the 19th Denman Undergraduate Research Forum
Academic Major: Finance
Fisher College of Business
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