The Magnet Effect of Price Limits: A Logit Approach
Posted: 26 Oct 2009 Last revised: 20 Nov 2016
Date Written: 2009
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.
Keywords: Price limits, Magnet effect, Transaction data, Logit model
JEL Classification: G14, G15, G18
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