An Analysis Of The Volatility Effect Under Price Limits-the Evidence From The Growth Enterprise Market

Since it was listed on October 30,2009, the growth enterprise market (GEM) has widened the financing platform for the small and medium-sized enterprises, which is beneficial to the construction of multi-level capital market system in our country. Relative to the main board, companies in the GEM are high-tech, high-growth, small and medium-sized enterprises, and thus have higher risk and stock price volatility. The GEM has adopted a 10% price limit system since its inception, aiming to reduce the market volatility, stabilize the market, improve its efficiency, and promote its healthy development.Up to now, the effectiveness of the price limit system has been in debate in academia. Most of the current research studies this system from three aspects, namely volatility spillover effect, delayed price discovery effect, and trading interference effect, in order to evaluate the its effectiveness. In this paper, we examine these effects with three hypotheses, and we find that these three effects do exist in the GEM.Based on the econometric models proposed in the literature, we conduct empirical analysis to investigate the impact of the 10% price limit in GEM. We first describe the price limit system and its effects in theory, and summarize the empirical results in the domestic and foreign stock market from the previous literature. Then we use the well-known ARCH model to study the stock return volatility in the GEM empirically. In particular, we use the GARCH (1,1) model with two dummy variables to examine the effect of price limit system on the stocks in the GEM. We also adopt the approach of event study and construct comparison groups, which sets the price limit day as a separate event, and compare the price changes before and after the event. Based on our empirical analyses, we have the following three findings:(1) Both the upper and lower limits affect the stock return volatility. For the actively traded stocks, upper limit can aggravate price volatility. For the inactively traded stocks, however, upper limit can suppress price volatility to some extent. To both the actively or inactively traded stocks, lower limit suppresses price volatility in the next trading day.(2) For both limits, the delayed price discovery effect does exist in the GEM. Without price limits, the stock prices are more easily corrected in the next trading day after the prices go up or down substantially.(3) For both limits, the trading interference effect does exist in the GEM. After limits are hit, stock turnover increases substantially in the next day, but the liquidity declines sharply in the third trading day. Without price limits, the stock turnover increases substantially only in the event day, but the liquidity declines sharply in the next trading day.