Price Bands and Their Effects on Equity Markets: Evidence from a Natural Experiment

Vladimir A. Gatchev; Rama Seth; Ajai Singh; S. R. Vishwanatha

doi:10.1016/j.finmar.2023.100840

Price Bands and Their Effects on Equity Markets: Evidence from a Natural Experiment

Vladimir A. Gatchev^*, Rama Seth, Ajai Singh, S. R. Vishwanatha

^*Corresponding author for this work

Department of Finance

Research output: Contribution to journal › Journal article › Research › peer-review

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Abstract

We exploit a unique experiment, where the intraday price moves of Indian IPO listings are restricted within a narrow band, to examine the consequences of price bands for stock prices, investor trading behavior, and stock market liquidity. Based on difference-in-differences estimations, we find that price bands lead to a significant reduction in the price variability of IPO stocks. The decrease in variability is accompanied by increases in post-IPO selling by individual investors, the price impact of trades, and IPO expected returns. Bid-ask spreads remain similar. The findings provide new evidence on the effects of intraday price bands on equity markets.

Original language	English
Article number	100840
Journal	Journal of Financial Markets
Volume	66
Number of pages	18
ISSN	1386-4181
DOIs	https://doi.org/10.1016/j.finmar.2023.100840
Publication status	Published - Nov 2023

Bibliographical note

Published online: 27 May 2023.

Keywords

Price limits
Stock market liquidity
Investor trading behavior
Asset prices
IPOs

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@article{8e40c2223b2b4a0283ebfa200a09062f,

title = "Price Bands and Their Effects on Equity Markets: Evidence from a Natural Experiment",

abstract = "We exploit a unique experiment, where the intraday price moves of Indian IPO listings are restricted within a narrow band, to examine the consequences of price bands for stock prices, investor trading behavior, and stock market liquidity. Based on difference-in-differences estimations, we find that price bands lead to a significant reduction in the price variability of IPO stocks. The decrease in variability is accompanied by increases in post-IPO selling by individual investors, the price impact of trades, and IPO expected returns. Bid-ask spreads remain similar. The findings provide new evidence on the effects of intraday price bands on equity markets.",

keywords = "Price limits, Stock market liquidity, Investor trading behavior, Asset prices, IPOs, Price limits, Stock market liquidity, Investor trading behavior, Asset prices, IPOs",

author = "Gatchev, \{Vladimir A.\} and Rama Seth and Ajai Singh and Vishwanatha, \{S. R.\}",

note = "Published online: 27 May 2023.",

year = "2023",

month = nov,

doi = "10.1016/j.finmar.2023.100840",

language = "English",

volume = "66",

journal = "Journal of Financial Markets",

issn = "1386-4181",

publisher = "Elsevier",

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T1 - Price Bands and Their Effects on Equity Markets

T2 - Evidence from a Natural Experiment

AU - Gatchev, Vladimir A.

AU - Seth, Rama

AU - Singh, Ajai

AU - Vishwanatha, S. R.

N1 - Published online: 27 May 2023.

PY - 2023/11

Y1 - 2023/11

N2 - We exploit a unique experiment, where the intraday price moves of Indian IPO listings are restricted within a narrow band, to examine the consequences of price bands for stock prices, investor trading behavior, and stock market liquidity. Based on difference-in-differences estimations, we find that price bands lead to a significant reduction in the price variability of IPO stocks. The decrease in variability is accompanied by increases in post-IPO selling by individual investors, the price impact of trades, and IPO expected returns. Bid-ask spreads remain similar. The findings provide new evidence on the effects of intraday price bands on equity markets.

AB - We exploit a unique experiment, where the intraday price moves of Indian IPO listings are restricted within a narrow band, to examine the consequences of price bands for stock prices, investor trading behavior, and stock market liquidity. Based on difference-in-differences estimations, we find that price bands lead to a significant reduction in the price variability of IPO stocks. The decrease in variability is accompanied by increases in post-IPO selling by individual investors, the price impact of trades, and IPO expected returns. Bid-ask spreads remain similar. The findings provide new evidence on the effects of intraday price bands on equity markets.

KW - Price limits

KW - Stock market liquidity

KW - Investor trading behavior

KW - Asset prices

KW - IPOs

KW - Price limits

KW - Stock market liquidity

KW - Investor trading behavior

KW - Asset prices

KW - IPOs

U2 - 10.1016/j.finmar.2023.100840

DO - 10.1016/j.finmar.2023.100840

M3 - Journal article

SN - 1386-4181

VL - 66

JO - Journal of Financial Markets

JF - Journal of Financial Markets

M1 - 100840

ER -