Are Price Limits Always Bad?

This paper re-examines the extent, if any, of the negative impacts of price limits. We provide fresh evidence supporting, only partially, the criticisms against the efficacy of such price limits: that price limits cause a spillover of volatility, delay the process of price discovery, and interfere with trading activity. A negative impact of price limits when valid for one group of stocks or direction of price move, may not hold for another group of stocks or direction of price move. The paper also presents a realistic estimate of the potential trading profits that may be made by using price limit hits as a signalling mechanism by quot;big handsquot; or as a forecasting tool by strategic traders. With the increase in the number of exchanges using electronic anonymous limit order trading mechanisms, and the greater ease with which regulators may interfere with the price and quantity dynamics, the new findings of this paper will continue to be important for academics, practitioners and regulators alike