Aberrant investor participation amid substantial price swings: high-frequency evidence of magnet-repellent effect from Malaysia

ABSTRACT

Price limits have skirted controversy since inception. Regulators claim limits curb volatility, allay stressed markets, and encourage reflection on information to trade rationally. Opponents contend saying limits delay the inevitable by postponing volatility, deferring equilibrium price discovery, and obtrude investors’ trading plans. While these undesired effects are all ex-post in nature, some argue that limits – by very existence – threaten to invite trading activities towards themselves and govern trade-flow such that the limit’s prophecy is fulfilled. This is known as magnet effect. Theoretical development of this ex-ante effect has been in hibernation since the 1990s. Thus, empirical attempts have been made to test its existence – mostly in East-Asian exchanges with tight limits. Bursa Malaysia, however, defends its ±30% limit for ~30 years based on internal (unpublished) studies. This paper employs a battery of tests to examine the existence and magnitude of magnet effect and – its counterpart – repellent effect in Malaysia. Our findings suggest a weak form of magnet effect and comparable degrees of repellent effect. Moreover, we report price acceleration beyond a threshold point unsupported by order aggression or volume support necessary to constitute a magnet effect. We discuss policy import of our findings and recommend future research avenues worthy of pursuit. Price limits’ opponents argue that limits can threaten to invite trading activities towards themselves such that the limit’s prophecy is fulfilled. Existence of this phenomenon—the magnet effect—has been tested mostly in exchanges with tight limits. This paper employs a battery of tests to examine the existence and magnitude of magnet effect in Bursa Malaysia, which employs a wide price limit. Our findings suggest a weak form of magnet effect and comparable degrees of repellent effect. Moreover, we report price acceleration beyond a threshold point unsupported by order aggression or volume support necessary to constitute magnet effect.

KEYWORDS:

• Price limits
• circuit breakers
• Bursa Malaysia

JEL CLASSIFICATION:

• D47
• G13
• G14

Disclosure statement

No potential conflict of interest was reported by the authors.

Additional information

Funding

This work was supported by the Ministry of Higher Education, Malaysia [FRGS-15-232-0473].

Notes on contributors

Imtiaz Mohammad Sifat

Imtiaz Mohammad Sifat is an independent researcher based in Kuala Lumpur, Malaysia. A former Khazanah Asia Scholar, his research interests encompass financial markets, applied econometrics, macroprudential policies, and risk management. He maintains a web presence at www.sifat.asia.

Azhar Mohamad

Azhar Mohamad is an Associate Professor of Finance at Department of Finance, IIUM, Malaysia. Aside from being the head of research, he is a prolific researcher known for ground-breaking contribution to the fields of short selling. He has published in leading journals such as British Accounting Review, International Review of Financial Analysis, The Developing Economies, and Applied Economics.

Zarinah Hamid

Zarinah Hamid is a Professor of Economics at Department of Economics, IIUM, Malaysia. An avid researcher in economics and statistics, she is the chief editor of International Journal of Economics, Management, and Accounting and sits on the editorial board of Journal of Palm Oil Research.