Impact of Price Limits on Market Volatility—An Empirical Study Based on Shanghai Composite Index

Abstract

At the beginning of 2016, the circuit-breaker event has pulled price limit system into our vision. It was implemented on Dec. 16, 1996, its impact on China's stock market is far-reaching. This paper bases on the related theory of the price limits and chooses the Shanghai composite index as object; then we establishes GARCH-type model to simulate and analyze the stock market before and after the system implementation. The empirical results show that, after the implementation of price limit system, market volatility lowered because standard deviation lowered, then through the model, the impact of the current market volatility on the short-term future is reduced, but price limits make the market response to the new information lag, market efficiency reduced, and fluctuation tends to delay which causes more overreaction, so market volatility actually increased. This paper also found the leverage effect of China's stock market is generally significant. Finally this paper will analyze the price limits and circuit-breaker mechanism, and put forward my thinking.