The Change Of Liquidity And Return Volatility Of Stock Market Before And After Equity Division Reform

Equity division refers to tradable and non-tradable shares splitting phenomenon existing on China’s stock market. On April29,2005, approved by the State Council, China’s equity division reform project was officially started. This is a major reform on China’s stock market, which lifted the ban on two-thirds of non-current market share and would inevitably have impact on the security markets. Most academic research of equity division reform in china focuses on the impact on the price level and protection of the interests of shareholders. This paper analyzes the effect of equity division reform brought to the stock market from the perspective of financial markets directly using the share data. This paper selects stock liquidity and return volatility as two angles, using portfolio approach, through the investigation of different markets, to analyze the changes of turnover, illiquidity and return variance before, during and after the reform. The study finds that turnover has nothing to do with the market value. Illiquidity and return variance have negative correlation with the market value. Stocks with larger capitalization have larger liquidity than those with smaller ones. Stocks with larger capitalization have less return volatility than those with smaller ones. Before, during and after the equity division reform, turnover increases gradually and illiquidity reduces significantly. The equity division reform reduces the average return volatility in the short term, but in the long term, due to the newly listed companies to join, especially GEM stocks added, the average return volatility has increased slightly. Overall, the equity division reform significantly improves the stock market liquidity and reduces its return volatility, and these improvements have long-term effects.