Trading aggression when price limit hits are imminent: NARDL based intraday investigation of magnet effect

Mohamad, Azhar and Sifat, Imtiaz Mohammad (2018) Trading aggression when price limit hits are imminent: NARDL based intraday investigation of magnet effect. Journal of Behavioral and Experimental Finance, 20. pp. 1-8. ISSN 2214-6350

	PDF (Trading aggression when price limit hits are imminent: NARDL based intraday investigation of magnet effect) - Accepted Version Restricted to Repository staff only Download (853kB) | Request a copy
Preview	PDF Download (165kB) | Preview
	PDF (WOS) - Supplemental Material Restricted to Registered users only Download (1MB) | Request a copy

Abstract

Utilizing an experimental Non-linear ARDL technique (NARDL), this paper tests an ex-ante hypothesized side-effect of financial market circuit breakers called the magnet effect. The hypothesis states that, in large price swing scenarios, circuit breakers (limits or halts), by their very existence, invite trading activities towards themselves in a way that the prophecy of the trigger is fulfilled. Most empirical works testing this effect hail from East Asian exchanges, which typically employ a tight price band. Our empirical venue, Bursa Malaysia, is a marked exception, sticking to a ±30% limit since 1989. Employing high-frequency (millisecond) proprietary intraday data from 2015 to 2017, we examine the magnet effect through order aggression and price velocity as the possibility of a limit draws closer. We find evidence of moderate magnet effect for most stocks, suggesting accelerated trading activities proportionate to likelihood of a limit-hit. The effect is more pronounced for lower limit stocks. Interestingly, several upper limit scenarios also exhibit the opposite of magnet effect: the repellent effect, suggesting investors recoil from trading when a limit-hit appears imminent. We discuss several regulatory, industry, and academic implications of our findings.

Item Type:	Article (Journal)
Additional Information:	3334/67778
Uncontrolled Keywords:	Circuit breakers; Price limits; Trading halts; Malaysia; Magnet effect; NARDL
Subjects:	H Social Sciences > HG Finance > HG4501 Stocks, investment, speculation
Kulliyyahs/Centres/Divisions/Institutes (Can select more than one option. Press CONTROL button):	Kulliyyah of Economics and Management Sciences > Department of Finance
Depositing User:	Dr Azhar Mohamad
Date Deposited:	22 Nov 2018 14:18
Last Modified:	27 Jan 2019 16:17
URI:	http://irep.iium.edu.my/id/eprint/67778

Actions (login required)

View Item