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

Yan Du, Qianqiu Liu and S. Ghon Rhee

No 2005-17, CEI Working Paper Series from Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University

Abstract: 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.

Keywords: Price Limit; Magnet Effect; Rate of Return; Trading Volume; Volatility; Order Flow; Order Type; Price Trajectory; Korea Stock Exchange (search for similar items in EconPapers)
JEL-codes: G14 G15 G18 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2006-03
Note: Current Draft: June 2005
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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