The magnet effect of price limits on the Shanghai Stock Exchange and the impact of the Shanghai - Hong Kong connect

This paper tests for the existence of the magnet effect linked to price limits imposed in China’s equity markets and how a market liberalization event affects trading in securities that are bound by price limits vis-à-vis those that are not. The magnet effect of price limits theorises that, instead of stabilising markets, price limits act as a magnet and their existence causes trading to accelerate towards the limits, increasing the likelihood of the limit being reached. This study provides evidence of the magnet effect in China and that the effect increases in magnitude following the opening of China’s capital markets via the Shanghai-Hong Kong Connect (SHHK Connect). The increased magnitude of the magnet effect of price limits is due to the new inflow of capital from global markets via Hong Kong, as stronger results are found for those firms that experience the largest increase in capital inflow vis-à-vis those that do not.