Investor sentiment and price limit rules

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This paper reports on an empirical examination of the relationship between a single-stock price limit rule and investor sentiment. While a single-stock price limit rule is new in U.S. markets, policymakers have used this tool for many years in futures markets and internationally to temper the impact of unwarranted price movements. The literature documents a significant impact of sentiment on pricing but is inconclusive regarding the efficacy of a single-stock price limit rule. We find that a price limit is more likely to be triggered when investor sentiment is extreme. Importantly, a significant portion of a price reaction to investor opinion is temporary. Thus, while some price changes reflect fundamental information, investors are prone to sentiment that moves markets based on misinformation.