The magnetic attraction of price limits

Author's Department

Management Department

Document Type

Research Article

Publication Title

International Journal of Business

Publication Date

12-1-2011

Abstract

This paper utilizes a natural experiment on the Egyptian Stock Exchange, where a tight symmetric 5 percent limit was imposed from 1997-2002, to test for the 'magnet effect' of price limits and provides evidence that it exists and is economically significant. I employ a logit model of the probability of reaching a limit with pooled time series data from individual firms across two sub-periods: a period with price limits versus one without. The result of this comparison shows that the conditional probability of reaching a limit rose after imposing the limits, substantiating the evidence on the presence of a magnet effect in markets with tight price limits.

First Page

35

Last Page

50

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