Are Magnet Effects Caused by Uninformed Traders? Evidence from Taiwan Stock Exchange

27 Pages Posted: 24 Dec 2007 Last revised: 9 Jul 2008

See all articles by Woon K. Wong

Woon K. Wong

IMRU, Cardiff Business School

Matthew C. Chang

Chinese Culture University

Anthony Tu

National Chengchi University

Abstract

Using transactions data, we find significant magnet effects of price limit rules in Taiwan Stock Exchange (TSEC). Consistent with Subrahmanyam (1994), we find that when limit hits are imminent, trading activities intensify with higher volumes 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 the magnet effects are caused by uninformed individuals, whereas if trade volumes are dominated by institutions, no significant magnet effect is found. The policy implication is that transparency and institutional participation can help to remove magnet effects.

Keywords: limit, magnet effect, transactions data, information asymmetry, Taiwan Stock Exchange

JEL Classification: G14, G15, G18

Suggested Citation

Wong, Woon K. and Chang, Matthew C. and Tu, Anthony, Are Magnet Effects Caused by Uninformed Traders? Evidence from Taiwan Stock Exchange. Pacific-Basin Finance Journal, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1078145

Woon K. Wong (Contact Author)

IMRU, Cardiff Business School ( email )

Cardiff CF10 3EU
United Kingdom

Matthew C. Chang

Chinese Culture University ( email )

No. 55, Hwa-Kang Rd.
Yang-Ming-Shan
Taipei City, 11114
Taiwan

Anthony Tu

National Chengchi University ( email )

No. 64, Chih-Nan Road
Section 2
Wenshan, Taipei 11623
Taiwan

Register to save articles to
your library

Register

Paper statistics

Downloads
141
Abstract Views
885
rank
208,873
PlumX Metrics