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The magnet effect of price limits: A logit approach

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  • Hsieh, Ping-Hung
  • Kim, Yong H.
  • Yang, J. Jimmy
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    Abstract

    We investigate the magnet effect of price limits using transaction data from the Taiwan Stock Exchange. A logit model incorporates explanatory variables from microstructure literature and reveals that the conditional probability of a price increase (decrease) increases significantly when the price approaches the upper (lower) price limit, in support of the magnet effect. Our approach recognizes when the magnet effect starts to emerge and identifies possible determinants of magnet effect. The probability of information-based trading has a significant impact on the magnet effect for lower price limits.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Empirical Finance.

    Volume (Year): 16 (2009)
    Issue (Month): 5 (December)
    Pages: 830-837

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    Handle: RePEc:eee:empfin:v:16:y:2009:i:5:p:830-837

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    Web page: http://www.elsevier.com/locate/jempfin

    Related research

    Keywords: Price limits Magnet effect Transaction data Logit model;

    References

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    5. David Abad & Roberto Pascual, 2007. "On the Magnet Effect of Price Limits," European Financial Management, European Financial Management Association, vol. 13(5), pages 833-852.
    6. Kim, Kenneth A. & Limpaphayom, Piman, 2000. "Characteristics of stocks that frequently hit price limits: Empirical evidence from Taiwan and Thailand," Journal of Financial Markets, Elsevier, vol. 3(3), pages 315-332, August.
    7. Marcelle Arak & Richard Cook, 1997. "Do Daily Price Limits Act as Magnets? The Case of Treasury Bond Futures," Journal of Financial Services Research, Springer, vol. 12(1), pages 5-20, August.
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    17. Cho, David D. & Russell, Jeffrey & Tiao, George C. & Tsay, Ruey, 2003. "The magnet effect of price limits: evidence from high-frequency data on Taiwan Stock Exchange," Journal of Empirical Finance, Elsevier, vol. 10(1-2), pages 133-168, February.
    18. Kim, Yong H. & Yagüe, José & Yang, J. Jimmy, 2008. "Relative performance of trading halts and price limits: Evidence from the Spanish Stock Exchange," International Review of Economics & Finance, Elsevier, vol. 17(2), pages 197-215.
    19. Goldstein, Michael A. & Kavajecz, Kenneth A., 2004. "Trading strategies during circuit breakers and extreme market movements," Journal of Financial Markets, Elsevier, vol. 7(3), pages 301-333, June.
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    Cited by:
    1. Levy, Tamir & Qadan, Mahmod & Yagil, Joseph, 2013. "Predicting the limit-hit frequency in futures contracts," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 141-148.
    2. Li, Huimin & Zheng, Dazhi & Chen, Jun, 2014. "Effectiveness, cause and impact of price limit—Evidence from China's cross-listed stocks," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 29(C), pages 217-241.

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