Research On Trading Rules Of Stock Market Based On The Market Microstructure

With the reform and development of economic system, the stock market functions of resource allocation and service for real economy are more and more important. Market quality has become one of the standard evaluations for capital market. The stock market as an important part of the capital market, how to set reasonable trading rules to ensure the improvement of the quality in stock market, and ultimately achieve the purpose of promoting the development of real economy, these are not only the core concerns of market participants, but also the focus of academic research.In addition, with the continuous development of the national economy and increasement of people's income, the investment demand will be increasingly strong. So, how to set reasonable trading rules to improve the investment environment, and meet the "open, fair and just" principle, that is related to the interests of each investor. Therefore, studying the effect of stock market trading rules on market quality, that is a matter of China's stock market development and improvement. This dissertation study the effect of price limit, day trading rules and margin trading on market quality. The main content and findings are as follows:First, we explore the effect of price limits on stock price and transaction behavior by using H-share as control group. The results show that, price limits not only reduce the price efficiency but also decrease the stock liquidity on the day of price-limit-hits. However, there is no enough evidence that price limits would interfere with the stock trading processes and we are not found the volatility spillover effect. We also find that when the closing price is locked at the limits, the greater the magnitude of H-shares price change, the more seriously the price discovery is delayed for A-share. When price limits are reached, the stocks with smaller illiquidity, lower turnover and smaller market capitalization would have lower return. Using the sample of A+H shares, our research gets rid of the fundamental difference between control group and price-limit-hit stocks to guarantee the accuracy of the results.Then, based on the natural experiment that T+0trading rule of stock market was adjusted to T+1on December1,2001, we explore the effect of day trading rule adjustment on the quality of stock market through difference-in-differences method and simultaneous equation model. The results show that though T+0trading rule would increase realized volatility and bid-ask spread, it could decrease the trading volume and price efficiency. So, the effect of trading rule adjustment on market quality is negative. Overall, this paper can provide valuable references for making more appropriate trading rule.Finally, we find the policy of margin trading is not to be expected. In the empirical analysis, we restrict our sample to firms both listed in Shenzhen and Shanghai A-shares and H-shares. Firms listed in the stock market of Hong Kong are treated as control group. Using the nature experiment of implement of margin trading, we empirically analysis the change of volatility, liquidity and trading volume of A-shares after the implement of margin trading. The results show that, after the implement of margin trading, the quality of stock market do not improved. The volatility of stock price of A-shares significantly increases. But the raising of volatility is due to the policy change in the short time. When we removed the data in one month before and after the policy change, the raising of volatility disappeared. In addition, the liquidity of stock is not affected by the policy of margin trading. Finally, Trading volume decreased significantly after the implement of margin trading. We should notice that at the beginning, the new policy has three main shortages. First, the participation threshold is high since a large amount security deposit is needed. Second, the number of stock which could be marginally traded is too small. Third, the transaction cost is too high. These shortages make the investors' motivation of participation depressed thus the function of margin trading is limited.The main innovation and contribution of the thesis contain:At first, this paper first uses H-share as control group to analysis the effect of price limit on market quality. By using the sample of A+H shares, our research gets rid of the fundamental difference between control group and price-limit-hit stocks to guarantee the accuracy of the results. Second, we use difference-in-differences method and simultaneous equation model to study the effect of day trading rule adjustment and implement of margin trading on the quality of stock market. By using those methods, we can control the endogenous relationship between volatility, liquidity and trading volume.