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

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.