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Order Aggressiveness and the Heating and Cooling-off Effects of Price Limits: Evidence from Taiwan Stock Exchange

Author

Listed:
  • Ming-Chang Wang

    (Department of Business Administration, National Chung Cheng University, Taiwan)

  • Yu-Jia Ding

    (Department of Logistics Management, National Defense University, Taiwan)

  • Pei-Han Hsin

    (Department of International Business, Cheng Shiu University, Taiwan)

Abstract

This study investigates the relationship between order aggressiveness and the distance between stock market prices and price limits in order to shed some light on the ‘heating’ and ‘cooling-off’ effects of these limits. Using intraday data on the Taiwan Stock Exchange (TSE), in conjunction with piecewise ordered probit regressions, we find that a significant ‘inverted-N’ (‘N’) shape pattern is discernible on the sell (buy) side of the relationship between order aggressiveness and price distance, which is consistent with the heating effect of upper (lower) price limits, as well as a cooling-off effect of lower (upper) price limits for market sellers (buyers). This study is the first to analyze changes of market participants’ order aggressiveness when approaching price limits. Our findings offer clear indications to policymakers that price limits could counteract irrational stock markets.

Suggested Citation

  • Ming-Chang Wang & Yu-Jia Ding & Pei-Han Hsin, 2018. "Order Aggressiveness and the Heating and Cooling-off Effects of Price Limits: Evidence from Taiwan Stock Exchange," Journal of Economics and Management, College of Business, Feng Chia University, Taiwan, vol. 14(2), pages 191-216, August.
    • Handle: RePEc:jec:journl:v:14:y:2018:i:2:p:191-216
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    References listed on IDEAS

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    Cited by:

    1. Jin, Liwei & Yuan, Xianghui & Li, Xiang & Ma, Huanglong & Lian, Feng, 2022. "Would widening price limits improve the efficiency of price discovery?," Finance Research Letters, Elsevier, vol. 50(C).
    2. Donald Lien & Pi-Hsia Hung & Chiu-Ting Pan, 2020. "Price limit changes, order decisions, and stock price movements: an empirical analysis of the Taiwan Stock Exchange," Review of Quantitative Finance and Accounting, Springer, vol. 55(1), pages 239-268, July.

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    More about this item

    Keywords

    market microstructure; heating effect; cooling-off effect; price limits; order aggressiveness;
    All these keywords.

    JEL classification:

    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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