We investigate the magnet effect of price limits using transactions data from the Taiwan
Stock Exchange. Using a logit model that incorporates explanatory variables documented
in the microstructure literature to capture transaction price changes, we find that the
conditional probability of price going up (down) increases significantly when the price is
approaching the upper (lower) price limit, supporting the magnet effect. We find that the
magnet effect starts to emerge when the price is within 10 ticks from the upper price
limits and about 5 ticks from the lower price limits. We also examine firm characteristics
to identify possible determinants of magnet effect and find that beta, trading volume,
market capitalization, and book-to-market are positively related to the degree of magnet
effect. Our overall results generate important policy implications.
