Price limit changes, order decisions, and stock price movements: an empirical analysis of the Taiwan Stock Exchange

This study examines the relationships among price limit changes, order submission decisions, and stock returns in the Taiwan Stock Exchange. Specifically, we first investigate whether price limit changes affect overall investors' order aggressiveness and trade size. We then analyze the relationships across trader types. Finally, we analyze the effects on future stock returns. Our analysis yields the following findings. (1) Stock traders' order submission decisions are quite different in the post- versus pre-event periods, as they place orders at more aggressive prices but with smaller sizes after the price limit changes. (2) Buy and sell orders demonstrate asymmetric effects with sell orders responding to a policy change in a more diversified way than do buy orders. (3) The sensitivities of order submission decisions to a policy change are significantly different across trader classes. Foreign investors are conservative while investment trusts drastically change their post-event order submission behaviors. (4) Professional institutions' trade size is a better predictor of future stock returns than order aggressiveness.