The Effects Of Closing Trading Mechanism On Market Volatility And Market Efficiency

The stock market is a concentrated expression of a country’s economic development. Mature stock market represents higher level of economic development. Stock market microstructure theory is one of the fundation theories of stock market research. Market microstructure theory suggests that trading mechanisms will affect market volatility and market efficiency. It is important for the market regulators, market makers and investors to construct a sound market microstructure for the stock market. This study uses the changes from continuous auction method to call market method of the Shenzhen main board market as the event to study the impacts of the close market mechanism on the stock market volatility and market efficiency, and goes as follows:The study carries out empirical analysis based on microstructure theory. The empirical results show that: First, after the market mechanism change, highly active trading stocks has smaller changes in volatility, while inactive trading stocks has bigger increase in market volatility. Overall, the market volatilities increase significantly under call market methods. Secondly, we studied the Shenzhen Component Index on daily return. By calculating the full distance of the sequence of the daily return, we found that the full distance of the daily yield becomes larger, which implies a greater fluctuation. We then construct a GARCH model to simulate the Shenzhen Component Index, the results show that call market method has a longer memory than the continuous auction method. By comparing the parametric equation of two different periods we found that call market method caused higher market volatility.Overall, our results show that call market method improves market efficiency, at the same time causes higher market volatility. We then offer some policy suggestions based on our research findings.