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

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