Empirical Research On Setting Triggers Of The Circuit Breaker Mechanism For Index On The Chinese Stock Market Using Extreme Value Theory

From January 1,2016,the Chinese stock market began to enact the circuit breaker mechanism for index whose benchmark index was CSI300 index.However,during only 4 trading days,there were 2 trading days on which the circuit breakers were triggered,leading Chinese exchanges to suspending the trading until the closing.The circuit breakers designed to provide a cooling-off period for investors to make rational decisions during panic trading,prevent the price from skyrocketing slump,and promote the stable development of our market.Nevertheless,events do not happen as one wishes.The circuit breaker mechanism might increase fluctuations in the market.Therefore,the three exchanges made the decision to suspend the implement of the circuit breaker mechanism for index from January 8,2016.There are many arguments about the circuit breaker mechanism,such as,whether should we introduce the circuit breakers into our financial market,how to implement the mechanism,and so on.Nevertheless,comparing with other countries's studies,most domestic studies on these issues are qualitative researches,with few empirical researches.So,the study of setting circuit breaker triggers on our stock market has practical significance.Fortunately,there are some empirical studies on these subjects.Booth and Broussard(1998)[1]had used extreme value theory to investigate the circuit breaker mechanism of the New York Stock Exchange.On this basis,Guo(2011)[2]studied the circuit breaker triggers on the Chinese stock index futures market using POT model,which is one type of the extreme value theory.This paper will continue to ameliorate this research method on the basis of these research idea,combined with the actual market situation in China,and the difference of our sample.The purpose of this amelioration is to set more reasonable circuit breaker triggers on our stock market.This paper will use the POT model to estimate the circuit breaker triggers from two angles,using daily index returns and using intraday maximum increase(decrease)rates.In addition,this paper will analysis whether it is necessary to set different suitable triggers in the upward and downward index movement respectively.Through the empirical analysis,we concluded the following results.1.When the abnormal fluctuation ratio is set to 0.5%,we can set the triggers to 7.6%if we decide to set a unified trigger in both upward and downward movement direction;and we can set the triggers to 7.0%(upward)and 7.8%(downward)if we decide to set triggers in upward and downward movement direction respectively.2.When the abnormal fluctuation ratio is set to 0.1%,we can set the trigger to 8.8%if we decide to set a unified trigger in both upward and downward movement direction;and we can set the triggers to 8.8%(upward)and 8.9%(downward)if we decide to set triggers in upward and downward movement direction respectively.From our empirical results in this paper,we also find that the fluctuations of CSI300 index upwards and downwards are asymmetric,so it is necessary to set respectively suitable triggers in either direction.It is well known that CSI300 index is composed of 300 stocks having price limits of 10%,which means that the fluctuation range of CSI300 index is[-10%,10%].In this range,if we set more than one triggers in both directions,we will be faced with the problem that these triggers are set too low and too close,which will lead to increasing the fluctuation of the market.Therefore,combined with the practical experience both home and abroad,this study choose to set only one suitable trigger in either direction.Compared with the existing studies,the innovations of this paper are as follows:1.As mentioned above,there are a smaller number of studies on circuit breakers at home and abroad.Among these studies,most domestic research on the circuit breaker mechanism are using methods of qualitative research,which are mainly commentary articles.There are few empirical quantitative studies on these subjects,especially on the subject of setting triggers of the circuit breaker mechanism.So,this paper's topic selection makes sense.2.The data,which this paper uses,consists of daily close CSI300 index values,daily high CSI300 index values and daily low CSI300 index values for the 10+ year period beginning April 8,2005,ending August 25,2015.It not only consists data in recent years,which reflects the latest stock market's performance,but also has the data for a long time span,which provides a sufficient sample.On this basis,the conclusion of the empirical research is more persuasive.3.This paper intends to analysis the results of the circuit breaker triggers from two angles,using daily index returns and using intraday maximum increase(decrease)rates.This means that we get two results,one sets a unified trigger to both upward and downward movement direction,and the other sets different triggers to upward and downward movement direction respectively.These results will help us to analyze whether it is necessary to set different suitable triggers in the upward and downward index movement respectively.