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The magnet effect of price limits: A logit approach

Author

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

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.

Suggested Citation

  • Hsieh, Ping-Hung & Kim, Yong H. & Yang, J. Jimmy, 2009. "The magnet effect of price limits: A logit approach," Journal of Empirical Finance, Elsevier, vol. 16(5), pages 830-837, December.
  • Handle: RePEc:eee:empfin:v:16:y:2009:i:5:p:830-837
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. repec:eee:phsmap:v:490:y:2018:i:c:p:953-966 is not listed on IDEAS
    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.
    3. Wu, Ting & Wang, Yue & Li, Ming-Xia, 2017. "Post-hit dynamics of price limit hits in the Chinese stock markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 465(C), pages 464-471.
    4. Gao-Feng Gu & Xiong Xiong & Hai-Chuan Xu & Wei Zhang & Yong-Jie Zhang & Wei Chen & Wei-Xing Zhou, 2017. "An empirical behavioural order-driven model with price limit rules," Papers 1704.04354, arXiv.org.
    5. repec:spr:annopr:v:260:y:2018:i:1:d:10.1007_s10479-016-2317-y is not listed on IDEAS
    6. Kenneth A. Kim & Haixiao Liu & J. Jimmy Yang, 2013. "Reconsidering Price Limit Effectiveness," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 36(4), pages 493-518, December.
    7. Haghighi, Afshin & Fallahpour, Saeid & Eyvazlu, Reza, 2016. "Modelling order arrivals at price limits using Hawkes processes," Finance Research Letters, Elsevier, vol. 19(C), pages 267-272.
    8. 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.
    9. Yu-Lei Wan & Gang-Jin Wang & Zhi-Qiang Jiang & Wen-Jie Xie & Wei-Xing Zhou, 2018. "The cooling-off effect of price limits in the Chinese stock markets," Papers 1803.09422, arXiv.org.

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