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Are magnet effects caused by uninformed traders? Evidence from Taiwan Stock Exchange

Wong, Woon K.; Chang, Matthew C.; Tu, Anthony H.

Authors

Woon K. Wong

Matthew C. Chang

Anthony H. Tu



Abstract

Using transactions and quotes data, we find significant magnet effects of price limit rules in Taiwan Stock Exchange (TSEC). Consistent with Subrahmanyam [Subrahmanyam, A., 1994. Circuit breakers and market volatility: a theoretical perspective. Journal of Finance 49, 237-254], we find that when limit hits are imminent, trading activities intensify with higher volume and volatility. More importantly, our transactions data allows us to examine the roles of institutions and individuals in the magnet effects in TSEC. There is strong evidence that magnet effects are caused by uninformed individuals, whereas if trade volumes are dominated by institutions, no significant magnet effect is found. The policy implication of our findings is that transparency and institutional participation can help to reduce the frequency of magnet effects. © 2008 Elsevier B.V. All rights reserved.

Citation

Tu, A. H., Chang, M. C., & Wong, W. K. (2009). Are magnet effects caused by uninformed traders? Evidence from Taiwan Stock Exchange. Pacific-Basin Finance Journal, 17(1), 28-40. https://doi.org/10.1016/j.pacfin.2008.03.001

Journal Article Type Article
Publication Date Jan 1, 2009
Deposit Date Jan 19, 2012
Journal Pacific Basin Finance Journal
Print ISSN 0927-538X
Publisher Elsevier
Peer Reviewed Not Peer Reviewed
Volume 17
Issue 1
Pages 28-40
DOI https://doi.org/10.1016/j.pacfin.2008.03.001
Keywords magnet effects, traders, Taiwan Stock Exchange
Public URL https://uwe-repository.worktribe.com/output/1006453
Publisher URL http://dx.doi.org/10.1016/j.pacfin.2008.03.001


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