Empirical Research On The Information Transmission Of Price Limit System From The Perspective Of Market Microstructure:Evidence From The Chinese A-Share Stock Market

Although there are many scholars pay attention to the issue that how the price limit system can influence the market, but they are nothing more than to test the four effects, that is, volatility spillover effect, delayed price discovery effect, trading interference effect, magnet effect, and to find whether the price limit trading system is effective, few scholars study this issue from the point of the information transmission.In this thesis, we establish the model that how the informed traders disclose their private information through pushing the stock price to the limit, and do empirical research on whether there exist limit-up premium effect and limit-down discount effect. We further analyze the characteristics of the stock that usually hit the limit. Finally, we investigate the relationship between the limit-up and high-volume.The theoretical significance of this thesis is to enrich the relevant research literatures and provide new evidence on the weak effectiveness of the Chinese’s A-share market and to improve our understanding of the relationship between price and volume. We also hope this thesis can provide a solid foundation for policy makers to improve this trading system and give some valuable advice to investors to make the right decision.In this thesis, based on the market microstructure theory, we first establish a theoretical model to show why the stock price limit-up can transfer the informed traders’private information into the market, then to test whether there exist limit-up premium effect and limit-down discount effect and give the suitable explanations. Second, we further analyze the characteristic of the stock which usually hit the limit price. Finally, we examine the relationship between limit-up and high-volume.The thesis begins with a literature review and then followed by background analysis and empirical research. It is divided into seven chapters.Chapter one is an introduction of the research background, issues, contents, framework and the contribution of the thesis.Chapter two introduces the market microstructure theory focusing on market structure, information-based models and the strategy of the informed traders.Chapter three is the literature review on the limit price system and the stock price changes dramatically in one-day. We first introduce the previous studies about the influence of limit price on the market efficiency, such as volatility spillover effect, delayed price discovery effect, trading interference effect and magnet effect. Then, we summarize the research on the impact of big price changes(either increases more than10%or decreases more than10%).Chapter four is the basis of the chapter five and six. In this chapter, we first establish a theoretical model to show why the stock price limit-up can transfer the informed traders’private information into the market. Second, we use event study method to find that there indeed exist limit-up premium and limit-down discount in the Chinese A-Share Market. The delayed price discovery hypothesis, momentum effect, reversal effect, announcement effect, market risk and liquidity premium all do not seem to explain our results. We show that investors’attention can explain the limit-up premium better, however, the disposition effect can make a reasonable explanation about the limit-down discount effect. Finally, we also find that the investors can obtain the economic profitability based on the transmission of the signals of the stock price limit-up or down.On the basis of chapter four, in chapter five, we further use GMM method to analyze what factors can explain the frequency of each stock hiting a price limit. We find that volatile stocks, actively-traded stocks, small market capitalization stocks and value stocks hit price limit-up or limit-down more frenquently than other stocks, at the same time, the fundamentals of a company is also a main factor in explaining the frequency of each stock hiting a price limit-down. According to the Chinese A-Share Market’s own characteristics, we divide our sample into two different kinds of sub-samples:bull and bear, before and after the share reform, to further analyze the characteristics of stocks in the two specific market conditions. At last, we give the related investment suggestions.In chapter six, we find that there does not exist the high-volume premium but the high-volume discount in the Chinese A-Share Stock Market, moreover we find that there exists the limit-up premium. We further find that the limit-up and the high-volume are closely related to each other:The high-volume before the limit-up can deliver a stronger positive signal to the stock market; even the high-volume before the limit-up is also convey a negative signal; the high-volume after the limit-up can convey much stronger negative signal. We believe that it’s not the high-volume stocks that attract investors’attention but the limit-up stocks do. At last, we give some related investment suggestions.Chapter seven is the conclusion of this thesis. It consists of the research finding, the advices we have made, the limitations of this thesis and directions for future research.To summarize, the major contributions of this thesis are as follows.(1) From a new perspective-the signal of the informed traders, we do empirical research on the influence of limit price system on stock price.(2) We further analyze the characteristics of stocks which usually hit limit price level in the two specific market conditions:bull and bear, before and after the share reform.(3) We also further analyze the relationship of limit-up and high volume in the Chinese’s A-share stock market.