We test two hypotheses to investigate whether price limits reduce or induce
overreaction. The first hypothesis is called the cooling-off hypothesis, which
suggests that price limits can reduce overreaction because they provide a cooling-
off period for investors to re-evaluate market information and make more rational
trading decisions. To test this hypothesis, we identify three different limit
hits, namely, closing limit hits, single limit hits, and consecutive limit hits.
The cooling-off hypothesis is only supported by consecutive limit hits. The second
hypothesis is called the magnet hypothesis, which suggests that price limits induce
overreaction because investors may rush to submit orders when prices are
approaching the limits disregarding that those orders do not meet their optimal
trading strategy. We test this hypothesis by examining return autocorrelations,
trading volume, and relative spread. We find support for the magnet hypothesis in
our measures of trading volume and relative spread, but no support from the return
autocorrelations. Overall we conclude that price limits induce overreaction when
the price is approaching the limit, but they also reduce overreaction when the
limit price is traded at consecutively.
학회소식
공지사항
[2003년 제 2차] Price Limits and Overreaction
작성자 : 관리자
조회수 : 1004
게시일 :
2003-07-12