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Investor sentiment and price limit rules

Author

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  • Ackert, Lucy F.
  • Huang, Yaru
  • Jiang, Lei

Abstract

This paper reports on an empirical examination of the relationship between a single-stock price limit rule and investor sentiment. While a single-stock price limit rule is new in U.S. markets, policymakers have used this tool for many years in futures markets and internationally to temper the impact of unwarranted price movements. The literature documents a significant impact of sentiment on pricing but is inconclusive regarding the efficacy of a single-stock price limit rule. We find that a price limit is more likely to be triggered when investor sentiment is extreme. Importantly, a significant portion of a price reaction to investor opinion is temporary. Thus, while some price changes reflect fundamental information, investors are prone to sentiment that moves markets based on misinformation.

Suggested Citation

  • Ackert, Lucy F. & Huang, Yaru & Jiang, Lei, 2015. "Investor sentiment and price limit rules," Journal of Behavioral and Experimental Finance, Elsevier, vol. 5(C), pages 15-26.
    • Handle: RePEc:eee:beexfi:v:5:y:2015:i:c:p:15-26
    DOI: 10.1016/j.jbef.2015.01.001
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    Citations

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    Cited by:

    1. Cheng Xiang & Jing Lu, 2023. "Magnet effects of circuit breakers in electronic order‐driven markets: Evidence from China," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(2), pages 1450-1469, April.
    2. Ming-Chang Wang & Yu-Jia Ding & Pei-Han Hsin, 2018. "Order Aggressiveness and the Heating and Cooling-off Effects of Price Limits: Evidence from Taiwan Stock Exchange," Journal of Economics and Management, College of Business, Feng Chia University, Taiwan, vol. 14(2), pages 191-216, August.
    3. Manhwa Wu & Paoyu Huang & Yensen Ni, 2020. "The Impact of Institutional Shareholdings on Price Limits," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 27(3), pages 343-361, September.
    4. Tang, Siyuan, 2023. "Price limit performance: New evidence from a quasi-natural experiment in China's ChiNext market," International Review of Financial Analysis, Elsevier, vol. 89(C).
    5. Ackert, Lucy F. & Jiang, Lei & Lee, Hoan Soo & Liu, Jie, 2016. "Influential investors in online stock forums," International Review of Financial Analysis, Elsevier, vol. 45(C), pages 39-46.
    6. Seza Danışoğlu & Z. Nuray Güner, 2018. "Do price limits help control stock price volatility?," Annals of Operations Research, Springer, vol. 260(1), pages 129-157, January.
    7. Xiao, Yuewen & Zheng, Xinwei & Wang, Chengsi, 2024. "Price limit hits in the Chinese fund market: Determinants and post-hit performance," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 70-82.

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