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An Anatomy of the Magnet Effect: Evidence from the Korea Stock Exchange High-Frequency Data

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  • Du, Yan
  • Liu, Qianqiu
  • Rhee, S. Ghon
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    Abstract

    We examine the existence and the forms of the magnet effect using transaction files and limit order book of the Korea Stock Exchange. A significant magnet effect exists in all five market microstructure variables (the rate of return, trading volume, volatility, order flow, and order type) when the limit hit becomes imminent. Specifically, investors place increasingly more orders, choose proportionally more market orders, and frequently reposition existing orders to advance transactions. We also find that: (i) a narrower price limit exhibits higher acceleration rates in all five variables compared to a wider price limit; and (ii) the upper limit hits draw heavier volumes of transactions, order submissions and market orders than the lower limit hits. We confirm that the magnet effect is a phenomenon unique only to markets with daily price limit systems.

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    File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/13490/1/wp2005-17a.pdf
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    Bibliographic Info

    Paper provided by Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University in its series CEI Working Paper Series with number 2005-17.

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    Length: 50 p.
    Date of creation: Mar 2006
    Date of revision:
    Handle: RePEc:hit:hitcei:2005-17

    Note: Current Draft: June 2005
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    Related research

    Keywords: Price Limit; Magnet Effect; Rate of Return; Trading Volume; Volatility; Order Flow; Order Type; Price Trajectory; Korea Stock Exchange;

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    1. Kim, Kenneth & Rhee, S Ghon, 1997. " Price Limit Performance: Evidence from the Tokyo Stock Exchange," Journal of Finance, American Finance Association, vol. 52(2), pages 885-99, June.
    2. Kim, Kenneth A., 2001. "Price limits and stock market volatility," Economics Letters, Elsevier, vol. 71(1), pages 131-136, April.
    3. Ma, C.K. & Rao, R.P. & Sears, R.S., 1989. "Volatility, Price Resolution, And The Effectiveness Of Price Limits," Papers t7, Columbia - Center for Futures Markets.
    4. Lee, Charles M C & Ready, Mark J & Seguin, Paul J, 1994. " Volume, Volatility, and New York Stock Exchange Trading Halts," Journal of Finance, American Finance Association, vol. 49(1), pages 183-214, March.
    5. 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.
    6. Wood, Robert A & McInish, Thomas H & Ord, J Keith, 1985. " An Investigation of Transactions Data for NYSE Stocks," Journal of Finance, American Finance Association, vol. 40(3), pages 723-39, July.
    7. Anat R. Admati, Paul Pfleiderer, 1988. "A Theory of Intraday Patterns: Volume and Price Variability," Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 3-40.
    8. Chan, Soon Huat & Kim, Kenneth A. & Rhee, S. Ghon, 2005. "Price limit performance: evidence from transactions data and the limit order book," Journal of Empirical Finance, Elsevier, vol. 12(2), pages 269-290, March.
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