Magnet Effects of Price Limits: Evidence from a Market Liberalization Experiment

38 Pages Posted: 13 Feb 2018

See all articles by Edward Curran

Edward Curran

Macquarie University - Faculty of Business and Economics

Vito Mollica

Macquarie Graduate School of Management; Capital Markets CRC Limited (CMCRC); Macquarie University, Macquarie Business School

Date Written: January 31, 2018

Abstract

This paper tests for the existence of the magnet effect linked to price limits imposed in China's equity markets and how a market liberalization event affects trading in securities bound by price limits. The magnet effect of price limits theorises that, instead of stabilising markets, price limits act as a magnet and result in trade acceleration towards the limits, increasing the likelihood of hit and subsequent constraint on prices. This study provides evidence of the magnet effect in China and evidence that its effect magnifies following the opening of China's capital markets via the Shanghai-Hong Kong Connect. The increased magnitude of the magnet effect of price limits is due to new capital inflow from global markets via Hong Kong, as effects are greater for firms that experience the largest increase in capital inflow.

Keywords: Price Limits, Magnet Effect, Market Liberalisation, Shanghai Hong Kong Connect

JEL Classification: G14, G1

Suggested Citation

Curran, Edward and Mollica, Vito, Magnet Effects of Price Limits: Evidence from a Market Liberalization Experiment (January 31, 2018). Available at SSRN: https://ssrn.com/abstract=3115844 or http://dx.doi.org/10.2139/ssrn.3115844

Edward Curran

Macquarie University - Faculty of Business and Economics ( email )

Sydney, New South Wales 2109
Australia

Vito Mollica (Contact Author)

Macquarie Graduate School of Management ( email )

Capital Markets CRC Limited (CMCRC) ( email )

Level 3, 55 Harrington Street
Sydney, 2000
Australia

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

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