An Empirical Research On Trading Mechanism And Return Volatility

The relationship between the trading mechanism and the volatility of return has been a popular problem for a long time. The choice of the trading mechanism is very important to the market design, which depends on the needs to measure the market quality. There for the volatility of return is a vital index. Based on the market microstructure theory, this paper firstly discusses how the different trading mechanisms decide the price and the relationship of the trading mechanism and the volatility of return. Then selecting the stocks synchronously listed in the market of Mainland China and Hong Kong as the sample, we empirically analyze the relationship of the trading mechanism and the volatility of return. After describing the originality variance ratio of the markets, this paper explains the outcome of the empirical and makes a GARCH (1, 1) model for further analyze. The paper comes to some conclusions as follows: 1. Under the same open and close trading mechanisms, the volatility of return is more affected by the accumulated information of the non-trading period before the market is opened. This viewpoint matched with the research result of priors'. 2. Contrasting the Hong Kong market, the market of Mainland China adopts a close auction mechanism; this mechanism does not efficiently reduce the volatility of return as it's proved in theory. This is because the close auction mechanism doesn't disclosure any information at all. According to the conclusions of the empirical study, this paper takes the stock market mechanisms and the behaviors of the investor and the price discovering processions together, to discuss how the market trading mechanisms and the behaviors of the investor affect the price process at present. And then, the paper reveals the efficiency of the stock market of China. At last, we take some advices about the innovation of the microstructure.