The Magnet Effect of Price Limits: A Logit Approach

Posted: 26 Oct 2009 Last revised: 20 Nov 2016

See all articles by Ping-Hung Hsieh

Ping-Hung Hsieh

Oregon State University - College of Business

Yong H. Kim

University of Cincinnati

J. Jimmy Yang

Oregon State University - College of Business

Date Written: 2009

Abstract

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

Suggested Citation

Hsieh, Ping-Hung and Kim, Yong H. and Yang, J. Jimmy, The Magnet Effect of Price Limits: A Logit Approach (2009). Journal of Empirical Finance, Vol. 16, No. 5, 2009, 830-837, Available at SSRN: https://ssrn.com/abstract=1494185

Ping-Hung Hsieh

Oregon State University - College of Business ( email )

Corvallis, OR 97331
United States

Yong H. Kim

University of Cincinnati ( email )

Lindner College of Business
410 Carl H. Lindner Hall, P.O. Box 210195
Cincinnati, OH 45221
United States
513-556-7084 (Phone)
513-556-0979 (Fax)

J. Jimmy Yang (Contact Author)

Oregon State University - College of Business ( email )

School of Accounting, Finance, and Information Sys
426 Austin Hall
Corvallis, OR 97331
United States
541-737-6005 (Phone)
541-737-4890 (Fax)

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