Do Price Limits Behave Like Magnets?

18 Pages Posted: 19 Jul 2004

Date Written: November 2003

Abstract

Using high frequency trade data, this paper tests, for the first time, the hypothesis that price limits behave like "magnets", and so, are self-fulfilling. It finds that price limits do not behave like "black holes" sucking in all stock prices. Also, there is an acceleration of trading activity as stocks approach the neighbourhood of their lower, but not their upper, price limit. Examining the extent of trading at the limit price appears to reveal more rational behaviour at the upper limit than at the lower limit.

Keywords: Price Limits, Magnet Hypothesis, Price Dynamics

JEL Classification: G14, G15, G18

Suggested Citation

Nath, Purnendu, Do Price Limits Behave Like Magnets? (November 2003). Available at SSRN: https://ssrn.com/abstract=565482 or http://dx.doi.org/10.2139/ssrn.565482

Purnendu Nath (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

HOME PAGE: http://phd.london.edu/pnath

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