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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

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.

Suggested Citation

  • Du, Yan & Liu, Qianqiu & Rhee, S. Ghon, 2006. "An Anatomy of the Magnet Effect: Evidence from the Korea Stock Exchange High-Frequency Data," CEI Working Paper Series 2005-17, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
    • Handle: RePEc:hit:hitcei:2005-17
    Note: Current Draft: June 2005
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    Cited by:

    1. Wong, Kin Ming & Kong, Xiao Wei & Li, Min, 2020. "The magnet effect of circuit breakers and its interactions with price limits," Pacific-Basin Finance Journal, Elsevier, vol. 61(C).
    2. Ya-Kai Chang & Che-Jui Chang, 2021. "The Magnet Effect Under Relaxed Daily Price Limits: Evidence From Taiwan," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 15(1), pages 33-44.

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    More about this item

    Keywords

    Price Limit; Magnet Effect; Rate of Return; Trading Volume; Volatility; Order Flow; Order Type; Price Trajectory; Korea Stock Exchange;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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