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Order Aggressiveness and the Heating and Cooling-off Effects of Price Limits: Evidence from Taiwan Stock Exchange

Ming-Chang Wang, Yu-Jia Ding () and Pei-Han Hsin
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Ming-Chang Wang: Department of Business Administration, National Chung Cheng University, Taiwan
Yu-Jia Ding: Department of Logistics Management, National Defense University, Taiwan
Pei-Han Hsin: Department of International Business, Cheng Shiu University, Taiwan

Journal of Economics and Management, 2018, vol. 14, issue 2, 191-216

Abstract: This study investigates the relationship between order aggressiveness and the distance between stock market prices and price limits in order to shed some light on the ‘heating’ and ‘cooling-off’ effects of these limits. Using intraday data on the Taiwan Stock Exchange (TSE), in conjunction with piecewise ordered probit regressions, we find that a significant ‘inverted-N’ (‘N’) shape pattern is discernible on the sell (buy) side of the relationship between order aggressiveness and price distance, which is consistent with the heating effect of upper (lower) price limits, as well as a cooling-off effect of lower (upper) price limits for market sellers (buyers). This study is the first to analyze changes of market participants’ order aggressiveness when approaching price limits. Our findings offer clear indications to policymakers that price limits could counteract irrational stock markets.

Keywords: market microstructure; heating effect; cooling-off effect; price limits; order aggressiveness (search for similar items in EconPapers)
JEL-codes: D47 G13 G14 (search for similar items in EconPapers)
Date: 2018
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