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

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Author Info
Du, Yan
Liu, Qianqiu
Rhee, S. Ghon
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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Publisher 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
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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;

Find related papers by JEL classification:
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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