Study On Efficiency Of Trading Halt And Resumption Mechanisms In Chinese Stock Market

As an important price-stabilization mechanism, the trading halt mechanism has been widely used by the main stock markets all over the world in the wake of 1987 stock market crash. However, the advantages and disadvantages of trading halts are widely debated. Proponents argue that halts allow traders enough time to react to material new information. Opponents argue that halts are unnecessary barriers to continuous trading and prevent traders from realizing their transaction demands timely. One critical factor in the debate above is, what are the impacts induced by trading halts under current market microstructure.It is well-known that the trading halt mechanism in Chinese stock market is characterized as trivial types, frequent occurrences, and long duration of halts. These distinguished features from oversea markets are always referred by the authorities in China to be the supporting evidences for the reforms on the trading halt mechanism. However, does it really work when such mechanism is directly copied from the oversea markets? Can such way reach the objectives of the reforms? So far, existing studies are very inadequate. Therefore, this dissertation uses the theories and methods of market microstructure to investigate, theoretically and empirically, the impacts of the trading halt mechanism on the Chinese stock market.Firstly, this dissertation constructs models under the framework of rational expectations to examine the differences in mispricing, information revelation, market depth and price volatility between the continuous trading and the trading halt mechanisms. The results show that the advantages or disadvantages of the continuous trading over the trading halt mechanism depend on the number of informed traders in the market (that is, the extent of information asymmetry). When there are few inside traders in the market (that is, the information asymmetry is high), trading halts produce less mispricing, higher efficiency of information revelation and lower price volatility than continuous trading. Otherwise, in the market with too many inside traders (that is, the information asymmetry is low), trading halts produce more mispricing, lower efficiency of information revelation and higher price volatility than continuous trading. Moreover, whether the number of insiders is high or low, the depth after trading halts is always higher than that during continuous trading. In addition, the precision of public information will affect the efficiency of trading halts. The larger the precision of public information is, the less mispricing, more efficiency of information revelation, higher market depth and lower price volatility there are after trading halts.Secondly, since the implications of theoretical models, this dissertation employs depth and volatility as the indicators to measure the effects of trading halts. Using the trading halts and transaction data of A-shares listed in the Shenzhen stock exchange from 2006 to 2008, this dissertation creates a"halt-day"sample and the corresponding"non-halt-day"sample, whereby investigates the effects of the trading halt mechanism on the Chinese stock market. The results show that, compared with the stocks in the non-halt-day sample, the stocks after trading halts, whether routine halts or warning halts, involve higher depth and larger volatilities during the subsequent 15-minite period. The results of routine trading halts are consistent with the implications of theoretical models, whereas the results of warning trading halts are not. Overall, the trading halt mechanism of the Chinese stock market is ineffective, and cannot achieve the original objectives of authorities to improve market efficiency. However, in subsamples, we find that warning halts for ST stocks are more effective than other kinds of trading halts, though the trading halt mechanism of the Chinese stock market is generally invalid. Furthermore, we also find that, the higher the information asymmetry is, the higher of market depth and the lower of the stock price volatility there are when trading halts are executed. And with the increase of information asymmetry in the market, the trading halts become more effective. Such finding is also consistent with the implication of the theoretical models.Finally, using the trading halt and transaction data of A-shares listed in the Shenzhen stock exchange in 2006, this dissertation empirically investigates the stocks with same reason of halts (i.e., general meeting of shareholders) but different forms of resumption (open or close call auction). The results show that, compared with close call auction, open call auction during resumption improves transparency, and promotes the revelation of new information, and enhances the participating enthusiasm of traders in the opening auction, and, as a result, make the resumption price more sufficient in revealing new information during trading halt. Furthermore, the trading is more liquid and less volatile following resumption with open call auction than with close call auction mechanism. This indicates that the call auction mechanism can efficiently improve the efficiency of price discovery after trading halts.Overall, this dissertation analyzes problems related to the trading halt mechanism on the Chinese stock market. Specifically, this dissertation theoretically models trading halt of individual stock, and takes empirical tests on the effects of trading halt and the selection of resumption forms in detail. The results not only supplement the studies on the trading halt mechanism in the stock market, but also provide strong evidences for the recent reforms on the Chinese stock market, and further provide valuable policy references for future reforms and improvements of this mechanism.