Price discovery and volatility spillover with price limits in Chinese A-shares market: A truncated GARCH approach

C. J. Adcock, C. Ye, S. Yin and D. Zhang

Journal of the Operational Research Society, 2019, vol. 70, issue 10, 1709-1719

Abstract: The use of price limits by a stock exchange means that the distribution of returns is truncated. By considering a GARCH model in conjunction with a truncated distribution for the residuals, this study investigates whether price limits have an effect on price behaviour and volatility of Chinese A-shares. The analysis has been applied to A-shares traded on the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE) during the period from 2004 to 2018. The results suggest the Truncated-GARCH model outperforms a conventional model and offers substantially different insights into the effect of price limits. The delayed price discovery hypothesis is not rejected for either exchange after upper price limit hits. Limited evidence supports the volatility spillover hypothesis, as just over 5% of A-shares experience an increase of volatility after upper price limit hits on both exchanges. No evidence of reduction of volatility after price limit hits is shown in the research.

Date: 2019
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DOI: 10.1080/01605682.2018.1542973

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