The Magnet Effect of Price Limit in Tehran Stock Exchange

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Alavian Ghavanini, Mohammad | 2012

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Type of Document: M.Sc. Thesis
Language: Farsi
Document No: 42594 (44)
University: Sharif University of Technology
Department: Management and Economics
Advisor(s): Zamani, Shiva
Abstract:
Nowadays, in many financial markets, policy makers impose daily price limit to prevent investors from making emotional decisions, which can lead to abnormal price volatility. A number of theoretical and empirical studies have been conducted on the effectiveness of setting price limit, some supporting the idea and other rejecting. In this research, we begin with a detailed analysis of magnet effect as one of the consequences of setting price limit. Then we study the stock price of five firms listed in Tehran Stock Exchange (TSE) by means of an autoregressive model with explanatory variables to determine whether or not the magnet effect exists. These five firms, put together, comprise 23% of the total number of trades in TSE. The results indicate that the prices of North Drilling Company, Sina Bank, and SAIPA Company show a negative magnet effect to their ceiling price limits and those of North Drilling Company, Sina Bank, SAIPA Company, Iran Marine Industrial Company, and Telecommunication Company of Iran demonstrate a negative magnet effect to their floor price limits. We observed also that the magnet effect and the momentum effect are different phenomena
Keywords:
Tehran Stock Exchange ; Magnet Effect ; Price Limit ; High Frequency Data ; Momentum Effect

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