A Study On Adverse Effects Of Price Stabilization Mechanisms In Chinese Stock Market

Price limit and circuit breaker are common mechanisms of price stabilization in stock market,which were used to decrease the speculation,weaken strong fluctuation,stabilize the market and prevent financial crisis.However,the actual effect of the mechanisms of price stabilization is always in dispute.Critics argue that the contrived mechanisms may lead to several adverse effects on the market,such as volatility spillover effect,delayed price discovery effect,trading interference effect and magnet effect.Chinese price limit has been in use for many years,while Chinese circuit breaker has failed in 2016.The thesis is an empirical study on that whether Chinese mechanisms of price stabilization is effective and appropriate or not.Based on correlation theory,we used classical method to verify the effectiveness of price limit.We used intraday data and high frequency data from Shanghai and Shenzhen A-Share,with the event study,comparative groups and GARCH model,to investigate whether adverse effects exist.The result showed that delayed price discovery effect and trading interference effect near upper limit existed,while volatility spillover effect and magnet effect didn't exist.On the whole,although price limit destroyed market efficiency,it enhanced stability of Chinese stock market in this time,which reached the expected objects.By considering market index factors,the study tried to improve the classical method innovatively.Then the study investigated the influence of market index's change for the adverse effects of individual stocks,and whether circuit breaker will be effective in Chinese stock market.Finally,the study drew some conclusions.First,market index's change had little impact on volatility spillover effect.Second,market index's change weakened delayed price discovery effect and trading interference effect,except the slump in the index,which might enhance delayed price discovery effect.Third,a fall of market index enhanced magnet effect.In summary,only the fall of market index enhanced adverse effects.Therefore,regulators had better make an appropriate and safe circuit breaker near lower limit.It may be a nice assistant of price limit.