Are magnet effects caused by uninformed traders? Evidence from Taiwan Stock Exchange
Using transactions and quotes data, we find significant magnet effects of price limit rules in Taiwan Stock Exchange (TSEC). Consistent with Subrahmanyam [Subrahmanyam, A., 1994. Circuit breakers and market volatility: a theoretical perspective. Journal of Finance 49, 237-254], we find that when limit hits are imminent, trading activities intensify with higher volume and volatility. More importantly, our transactions data allows us to examine the roles of institutions and individuals in the magnet effects in TSEC. There is strong evidence that magnet effects are caused by uninformed individuals, whereas if trade volumes are dominated by institutions, no significant magnet effect is found. The policy implication of our findings is that transparency and institutional participation can help to reduce the frequency of magnet effects.
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