Do regulations work? A comprehensive analysis of price limits and trading restrictions in experimental asset markets with deterministic and stochastic fundamental values

Zhengyang Bao, Kenan Kalaycı, Andreas Leibbrandt, Carlos Oyarzun

Research output: Contribution to journalArticleResearchpeer-review

Abstract

We examine how traders react to two prominent stock market regulations. Under a constant fundamental value (FV) process, price limits and trading restrictions significantly reduce the price level and mispricing size when traders are inexperienced. Under a Markov-process FV, there is no evidence for these regulations to reduce mispricing. The novel Markov process also serves as a testbed for several financial hypotheses related to the regulations. We find that price limits do not improve reactions to market news and the binding of price limits magnifies the momentum in the price movements. These findings suggest that the scope of these regulations is limited and that they can backfire in some market environments.

Original languageEnglish
Pages (from-to)59-84
Number of pages26
JournalJournal of Economic Behavior and Organization
Volume178
DOIs
Publication statusPublished - Oct 2020

Keywords

  • Asset market experiment
  • Price limits
  • The t + 1 rule

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