Price limits can stop the price of a stock from free fall-
ing on the trading day when a stock hits, the remaining part of
information shock will delay to the following trading days. Our
research is focusing on the traders evaluation of the remaining
information and its effect of the changes in trading volume.
In return, we control the increasing information on the fol-
lowing day when a stock hits limit. And also, we adapt Chiang
and Wei''s method(1995) to estimate the moments of the true
return ; to find the distribution of the ture return by moment
method; to estimate the true return by conditional
expectation. There- fore, we can analyze the traders''
adjustment of the remaining in- formation. In volume, we
control information shock, both the days when a stock hits
and the following day, to estimate the ab- normal volume.
We have four testable hypotheses in return: (1) delay effect
hypothesis, (2) risk premium hypothesis, (3) magnified effect
hypothesis, (4) cool-off effect hypothesis. Our research
reveals that a narrower price limit will cause market
overreaction, con- sisting with the magnified effect
hypothesis. And with the rela- xation of the price limit, the
cool-off effect will occur. With a smaller firm-size or a
higher turnover ration, the cool-off effect will get better.
In volume, we have two hypotheses: (1) liquidity hypothesis,
(2) barrier effect hypothesis. We find the price limit will re-
present barrier to market clearing on days they are in effect.
The barrier effect is more significant in upper limit hit than
in lower. And the more consecutive the price limit is, the
barrier effect is more obvious. The decreasing volume will be
compensa- ted in the following days and with a over-compensated
phenomenon.