2000, Effects of price limits on information revelation: theory and empirical evidence, Georgetown University working paper

Abstract: Many stock exchanges have daily price limits for individual stocks. The effects of these price limits are little understood, especially for price revelation and thus resource allocation. This paper models and tests how price limits may induce an informed investor to shift part or all of her profit-motivated trades until the next day, thus retarding the spread of information. The model implies these delays are particularly likely if the current price is near, but the equilibrium price is substantially beyond, today’s limit. In a series of tests on daily open, close, high, low and limit prices from the Taiwan Stock Exchange, results are consistent with the model; empirical results support the view both that informed investors ’ trades play a major role in price revelation and that price limits importantly delay price revelation