Price Limits On The Shanghai And Shenzhen Stock

Since December 16,1996,stock market in China has re-started the implementation of price limit system,which was designed to curb large fluctuation in the stock market,and stabilize the whole market.However,the scholars till now are not sure whether the system has played the role as the lead-in part,and what kind of influence caused by the volatility,liquidity and price discovery in the stock market, The paper aims at discussing the influence on volatility,liquidity and price discovery in Shanghai's and Shenzhen's stock market as the result of establishing the price limit system,and demonstrating the two cities' performance of the system.After summing up the relevant works written by the domestic and foreign scholars,a comparative analysis has been taken in this paper about profit volatility on both before and after the application of price-limit system by estimating the volatility rate both in the stock market and the particular share stock with the use GARCH-type model,which is a way to evaluate the impact of the system's performance on the stock's volatility.It is considered that the application of price limit system effectively lowered the volatility in A share stock market and have raised the B shares stock market's volatility at the same time.Take the whole market into consideration,price limit system still plays a role as a lead-in introduction,which effectively lowered the volatility in the whole stock market;Measuring both the stock market's liquidity and particular share stock liquidity by constructing the indicators of measurable liquidity, and taking a comparative analysis about stock's liquidity to evaluate the impact of the system's performance on the stock's liquidity,have proved that the application of price-limit system strengthens the liquidity in A share stock market,and at the same time,the liquidity in B share stock market goes down,with an interference in the transaction in B share stock market.Take the whole market into consideration, price-limit lowered the liquidity in stock market without the interference of liquidity; Through the construction of price discovery index,the test has been taken about over-reaction hypothesis and information hypothesis.The conclusion is made that the overreaction hypothesis about the stock markets in both two cities is proved to be tenable,and over-reaction is existing in the stock markets of two cities.And the application of price-limit system will provide a cooling-down period for investors to re-evaluate the value of the securities,without the interference during the process of price-discovery.