“Limit Up-Limit Down” Pilot Plan and Extraordinary Transitory Volatility
Dec. 21, 2017
Paul Hughes, John Ritter, and Hao Zhang
Abstract:
This paper examines how mechanisms within the Limit Up-Limit Down (LULD) Plan affect extraordinary transitory volatility (as measured by large, short-term trade-price reversals). The paper finds that large price reversals occurred less frequently under the LULD Plan than during a time period when there were no market-wide individual security price limits or circuit breakers (the time before single-stock circuit breakers, SSCBs, went into effect). The paper also compares the LULD mechanisms to the SSCB mechanisms and finds some evidence that is consistent with the LULD mechanisms reducing extraordinary transitory volatility relative to the SSCB mechanisms. However, the results vary depending on the specific methodology employed.