Abstract
We investigated the inter-day effects of price limits policies that are employed in agent-based simulations. To isolate the impact of price limits from the impact of other factors, we built an artificial stock market with higher frequency price limits hitting. The trading mechanisms in this market are the same as the trading mechanisms in China’s stock market. Then, we designed a series of simulations with and without price limits policy. The results of these simulations demonstrate that both upper and lower price limits can cause a volatility spillover effect and a trading interference effect. The process of price discovery will be delayed if upper price limits are imposed on a stock market; however, this phenomenon does not occur when lower price limits are imposed.
Highlights
The establishment of price limits is one of the most widely used price stabilization mechanisms in the stock market, especially in emerging markets such as China’s stock market
The simulation experiments were conducted with different settings; one group is without price limits, and the other group has price limits that were set at a 10% level, which is the same as China’s A-share market
We found that price limits can increase volatility after the price limits are hit
Summary
The establishment of price limits is one of the most widely used price stabilization mechanisms in the stock market, especially in emerging markets such as China’s stock market. Kim and Rhee [4] empirically tested these hypotheses regarding the effects of price limits on the Tokyo Stock Exchange, and they compared stock volatility, trading volume and returns among all groups of stocks Their findings support each of the three hypotheses and suggest that price limits may be ineffective. According to the above findings, researchers have not reached consistent conclusions regarding what and how price limits affect stock markets, but this trading mechanism clearly has a significant effect on stock price behavior [16]. A combination of the agent-based method and the empirical approach used by Kim and Rhee [4] is utilized to study the inter-day effects caused by price limits, and the ways in which price limits affect market efficiency are discussed
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