Limit Hit Research Articles

The Magnet Effect of Price Limits: An Agent-Based Approach

ABSTRACT In this paper, we study the magnet effect within the context of circuit breaker events that transpired in global stock markets during March 2020. Our analysis encompasses nine such events across six countries. Employing a time-distanced quadratic function to model trading activities leading up to limit hits, we observe a substantial acceleration in return movement and the convergence of traders’ behavior preceding limit hits. Furthermore, most circuit breaker events manifest a distinct reduction in trading volume and amplified market stability during this crucial phase. To gain deeper insights into the magnet effect, we employ an agent-based model of the stock market that incorporates price limits. Our model replicates the stylized facts associated with limit hit events and the magnet effect. Importantly, our simulation results closely align with empirical observations. We also emphasize the importance of market environment changes and shifts in traders’ behavior in influencing limit hit events and the magnet effect.

Price limit hits in the Chinese fund market: Determinants and post-hit performance

This article examines the predictors of price limit hits and post-hit market behaviors in the Chinese fund market. We show that macroeconomic news, past market returns, lagged limit hit dummies, and lagged price deviations have significant predictive powers for limit hits. We find that there is asymmetry between upper and lower limits, and between positive news and negative news. Furthermore, our tests of post-hit market dynamics provide evidence of volatility spillover after news upper-limit hits and no-news lower-limit hits. We find delayed price discovery except for no-news lower-limit hits, and a strong short-lived trading interference effect for news lower-limit hits. The price deviation is larger after news lower-limit hits but smaller after news upper-limit hits.

Charateristics of Stocks That Frequentley Hit Price Limits: Empirical Evidence from Japan

This paper examines the characteristics of stocks that hit the limits listed in the Tokyo Stock Exchange. Most of studies on price limit hits are carried out on stock markets that apply tight price limits rules such as the Taiwan Stock Exchange, the Stock Exchange of Thailand and Korea Stock Exchange. A market that applies tighter price limit rules experiences many limit-hit occurrences; this makes analysis simpler because the analysis can use a smaller number of stocks and a reasonable sample period. Therefore, this study contributes to the literature by examining the Tokyo Stock Exchange, which applies wide price limit rules. We analyzed the characteristics of stocks that hit the limits more frequently, stocks that hit the upper limits and stocks that hit the lower limits. Daily data were collected for all stocks listed in the Tokyo Stock Exchange from 2003 to 2007. The data were downloaded from the Datastream and the Tokyo Stock Exchange website. Three binary logistic regression models were applied. The first model tested the characteristics of stocks that hit upper and lower limits more frequently. The second model was for the characteristics of stocks that hit the upper limits, and the final model was for the characteristics of stocks that hit the lower limits. The results show that stocks that hit the upper limits tend to have a smaller systematic risk, while stocks that hit the lower limit tend to have a high systematic risk. This indicates that lower limit hits are due mostly to market-driven downward movements while upper limit hits are more likely related to company-driven upward movements. This means that price limits rules were effective in Japan in curbing undesired fluctuations of stock prices and in protecting the market from crashes. The results of the three models show that both upper and lower limit hits and upper and lower limit hits individually vary from year to year throughout the sample period. In general, high market value stocks, high volatility stocks, high residual risk stocks and low systematic risk stocks tend to hit the limits more frequently. The results also show that high market value stocks, high volatility stocks, high residual risk stocks, low liquidity stocks and low systematic risk stocks tend to hit the upper limits. Meanwhile, high market value stocks, high volatility stocks, high residual risk stocks, low liquidity stocks and high systematic risk stocks tend to hit the lower limits. Our study can be viewed as providing complementary evidence. By documenting some regularity with which price limit hit events occur, we offer new considerations to the current discussions surrounding price limit mechanisms. In spite of the negative effects shown by scholarly researchers, the popularity of price limits among both practitioners and stock exchange officials may be partially justified through our empirical evidence.

Does Price Limit Hit's Patterns Follow Stock Return Patterns?

The purpose of this study is to examine patterns of price limit hits for stocks listed on the Tokyo Stock Exchange. Explanations are provided for the empirical findings and the extent to which the price limit hit patterns are related to existing stock returns patterns. We argue that if patterns of price limits can be explained in the same way as the patterns of stock returns, this means price limit hits are not entirely due to noise trading. The Results show an increase of limit hits on Monday and Tuesday. These results of limit hits are consistent with the existing literature for the day-of-the-week effect of stock returns carried out in Japan. This indicates that such patterns of price limit hits are not all due to noise trading.

Price limits and volatility

This study provides new evidence on efficacy of daily price limit rules. We propose use of propensity score matching techniques to reduce sample selection bias in widely used Kim and Rhee (1997). Using data from the Tokyo Stock Exchange over a period of 5years from January 2001 to December 2005, this study shows that price limit rules work quite efficiently for lower limit hits as there is no evidence of volatility spill-over. We also find that daily price limits have differential effects on permanent and transitory components of daily volatility. Our study reports evidence of spill-over of permanent volatility. However, we find price limit successfully curbs the transitory volatility on the post limit hit days.

Post-hit dynamics of price limit hits in the Chinese stock markets

Abstract Price limit trading rules are useful to cool off traders short-term trading mania on individual stocks. The price dynamics approaching the limit boards are known as the magnet effect. However, the price dynamics after opening price limit hits are not well investigated. Here, we provide a detailed analysis on the price dynamics after the hits of up-limit or down-limit is open based on all A-share stocks traded in the Chinese stock markets. A “W” shape is found in the expected return, which reveals high probability of a continuous price limit hit on the following day. We also find that price dynamics after opening limit hits are dependent on the market trends. The time span of continuously hitting the price limit is found to an influence factor of the expected profit after the limit hit is open. Our analysis provides a better understanding of the price dynamics around the limit boards and contributes potential practical values for investors.

Do IPOs matter for price limits? Evidence from Taiwan

Abstract Given that the price limit hit is prominently displayed on the screen of the Taiwan Stock Exchange (TWSE), we explore whether price limits occur in initial public offering (IPO) firms according to the assumption that the sentiments of investors tend to be aroused by firms issuing IPOs and the price limit hit. Results reveal that price limits often occur in IPO stocks. The above phenomena do not only occur during the IPO issuing year, but may also be extended to the following year. We infer that several IPO firms tend to manipulate share prices, especially for technology and high-underpricing IPO firms. The results of this study may be interpreted from the sentiments of investors via the viewpoint of behavioral finance.

Predicting the limit-hit frequency in futures contracts

This study demonstrates how the predicted frequency of a limit hit can assist in designing an optimal futures contract with regard to two issues — the cost of trading and the construction of an optimal limit regime. Using a logit function, we present an initial attempt to estimate the probability of a price-limit hit given the following variables: the price-limit regime, the conditional volatility and the contract price level. The estimation procedure is applied to pork bellies and oats futures. The results imply that the logit model can be employed for predicting the expected limit-hit frequency. Our findings indicate that there is an inverse relationship between the conditional probability for a limit hit and the limit size, whereas the volatility and the price level are positively correlated with the conditional probability for a limit hit. Our findings also demonstrate the magnitude of the reduction in the limit-hit frequency resulting from a given increase in the price-limit size.

Price Limits and Volatility: A New Approach and Some New Empirical Evidence from the Tokyo Stock Exchange

This study aims to examine regularities of price limit hits for stocks listed in the TSE. Regularities of limit hits have not been examined before. The results show an increase of limit hits on Monday and Tuesday. These results of limit hits are consistent with the existing literature for the day-of-the-week effect of stock returns carried out on Japan. This indicates that such patterns of price limit hits are not all due to noise trading. The results also show that high limit hit occurrences are associated with high volatility and low limit hit occurrences are associated with low volatility.

Effectiveness of Price Limit Hits of Japan

The primary aim of this paper is to examine effectiveness of price limits for companies listed in the Tokyo Stock Exchange. Explanations are provided for the empirical findings and the extent to which the price limit hit regularities are related to existing stock returns regularities. We argue that if the regularities of price limit hits can be explained in the same way as the regularities of stock returns, this might mean price limit hits are not entirely due to noise trading. Results of the regularities for price limit hits show an increase of lower limit hits on March explained by tax-loss selling and an increase on upper limit hits in April explained by excess buying at the beginning of the new tax year that push stock prices to rise. These results of limit hits are consistent with the existing literature for the month-of-the-year-effect of stock returns carried out on Japan. This could indicate that such patterns of price limit hits are not all due to noise trading.

An Analysis of the Magnet Effect under Price Limits*

ABSTRACTUsing the Korea Stock Exchange's transaction data and limit order book, we document the accelerating patterns of market activity before limit hits. We confirm the existence of the magnet effect from several key market microstructure variables, using a parsimonious quadratic function of the time until the price limit hit. In addition, this paper is the first to isolate the intraday momentum effect from the magnet effect during the period before stock prices hit daily price limits.

Price Limits, Volatility, Liquidity and Abnormal Returns: An Event Study from the Athens Stock Exchange

Price limits are automated mechanisms that pre-specify the maximum daily percentage range - upwards and downwards - in which security prices are allowed to move within a single day. I examine if the price limits /-8% of the Athens Stock Exchange (ASE) for the bubble period 1998-2001 had an effect on volatility, liquidity and abnormal returns. I test three conjectures. The first is that price limits cause a decrease in - close to close or close to open - volatility the day(s) following a price limit hit against the alternative. The second is that price limits cause an increase in liquidity the day(s) following a price limit hit against the alternative. The third is that price limits cause market overreaction the day(s) following a price limit hit against the alternative. I use daily data for the period 01/06/1998 - 31/05/2001. The open to close volatility and the liquidity hypothesis are new to the price limits literature. My results are against price limits. I reject both volatility and liquidity conjectures while the overreaction is not rejected for the Up limits.

Are Limit Hits Industry-Specific?

This paper aims to examine the industry effect of limit hits of Tokyo Stock Exchange. The results show evidence of industry effect where information technology companies have the highest limit hits per company and utility companies have the lowest limit hits per company. High limit hit occurrences for different industries are associated with high volatility and low limit hit occurrences are associated with low volatility

Efektivitas Penerapan Price Limit di Bursa Efek Jakarta

Some stock markets have employed price limit to prevent market crash. The question about the effectiveness of price limit has long attracted research interest. Price limit advocates claim that price limits decrease stock return volatility, counter overreaction, and do not interfere with trading activity. Conversely, price limit critics claim that price limits cause higher volatility levels on subsequent days, prevent prices from efficiently reaching their equilibrium level, and interfere with trading due to limitations imposed by price limits. Empirical research does not provide conclusive support for either positions. This study empirically investigates the impact of a wide price limit on volatility, and overreaction, using the data from the Jakarta Stock Exchange, over the years 2000-2005. More specifically this study examines whether daily return volatility for stock-hit price limit are expected to be lower in the post limit hit period than the sample control groups. Beside that, in this study the phenomenon of short-term overreaction are examined.The main difference of this paper with the previous literatures is that this study compares volatility levels before and after price limit implementation on JSX. Firstly, empirical results indicate that volatility after price limit implementation shows highest level than before. Second, the results show that stocks-hit experiences their highest level of volatility on the day when stock-hit reach their limits, and then decreases significantly after the hit. Third, the findings indicate the occurrence of short-term overreaction for the sample of downward stock price movement, but not for the sample of upward stock price movement.

Switching to a Temporary Call Auction in Times of High Uncertainty

We evaluate a stock specific circuit breaker mechanism implemented in several European stock exchanges, which consists of a short-lived call auction triggered by intraday stock-specific price limits. This switching mechanism differs from the previously studied US trading halts in that it is short-lived, non-discretionary, and there is always a trading mechanism (continuous or discrete) going. It differs from daily price limits in that trade prices are not restricted once the limit has been hit; moreover, the intraday price ranges are smaller and adjusted to the recent volatility of the stock, so that limit hits are more frequent. Using data from the Spanish Stock Exchange (SSE), we show that market conditions remain usually high no longer than 90 minutes after the resumption of the continuous session. Adverse selection costs are unusually high near the time of the limit hit, but they revert to normal levels in no longer than 30 minutes after the restart of continuous trading phase. Moreover, price patterns show continuations during the 5-minute auction period and strong reversals in the 30-minute interval following the resumption of the continuous session. Afterwards, prices stabilize. These price patterns suggest that limit hits in the SSE are mostly provoked by noise traders overreacting to new information. We also show that higher returns during the auction are both preceded and followed by more unstable market conditions and higher adverse selection costs, and lead to stronger post-auction price reversions. Our findings contribute to the debate about the benefits and drawbacks of circuit breakers by enlarging the span of these mechanisms studied so far.

Do Price Limits Limit Price Discovery in the Presence of Options?

We examine the effect of price limits on futures contracts where there exist options contracts on those futures that have no price limits. We establish that when options are trading, the futures price implied by put-call parity provides an accurate prediction of the unconstrained futures price. We also provide empirical evidence that futures trading volume decreases on limit hit days, and that some of this decline is effectively transferred to the options market. These facts suggest that price discovery shifts to the options market when limit hits occur on the futures market. We also document that the microstructure of the future's market on the next day is affected positively by the presence of options on limit days, as the presence of options lowers spreads and reduces intra-day price variability. In total, we find that options assist in price discovery in the presence of limits.

An Anatomy of the Magnet Effect: Evidence from the Korea Stock Exchange High-Frequency Data

We examine the existence and the forms of the magnet effect using transaction files and limit order book of the Korea Stock Exchange. A significant magnet effect exists in all five market microstructure variables (the rate of return, trading volume, volatility, order flow, and order type) when the limit hit becomes imminent. Specifically, investors place increasingly more orders, choose proportionally more market orders, and frequently reposition existing orders to advance transactions. We also find that: (i) a narrower price limit exhibits higher acceleration rates in all five variables compared to a wider price limit; and (ii) the upper limit hits draw heavier volumes of transactions, order submissions and market orders than the lower limit hits. We confirm that the magnet effect is a phenomenon unique only to markets with daily price limit systems.