The magnet effect of price limits: evidence from high-frequency data on Taiwan Stock Exchange

Abstract

Abstract Many financial markets impose limits on the amount asset prices can change within a trading day to prevent the market from overreacting and, hence, to dampen volatility. Using intraday data from Taiwan Stock Exchange (TSE), we document a statistically and economically significant tendency for stock prices to accelerate toward the upper bound and weak evidence of acceleration toward the lower bound as the price approaches the bounds. Previous research has referred to this phenomenon as the magnet effect of daily price limits, but to the best of our knowledge, the results presented here are the first empirical verification of such an effect. The magnet effect continues to hold even after controlling for possible momentum effects. The economic significance is established by simulated trading strategies. In addition, the effect is further confirmed by data from different sample period.