Study On The Impact Of Special Regulation On Liquidity Contagion Under Extreme Downside In Chinese A-listed Stock Market

Liquidity contagion is a key characteristic in extreme fluctuations and declines.There are two aspects of liquidity contagion:liquidity commonality and liquidity spiral.Liquidity commonality is that certain common factors in the market affect the liquidity of all stocks.Hence,various stocks show a convergence in liquidity movement.Liquidity spiral is actually a domino effect.When asset prices drops,margin constraints become much tighter,especially for leveraged investors who are then forced to liquidate their position in a short time.Consequently,it causes a further drop in prices,while the dry-ups of liquidity also lead to a further drop in prices.When asset price plumps,the joint effect of liquidity commonality and liquidity spiral can cause a rapid decline of market liquidity and possibly a dry up of liquidity,followed with a vertiginous drop across all assets in the same class and sometimes across different classes in a short time.Compared to US stock markets,Chinese A-listed stock markets exhibit more frequent phenomenon of stock soaring and plunging.Moreover,there is more serious liquidity contagion situation in Chinese A-listed stock markets.These characteristics are related to some special regulations of Chinese A-listed stock markets,which are daily price limits,trading suspension and stock pledge.According to the data from January 2008 to December 2019,there are much more price limits hitters in the extreme downside period.Also,the ratio of firms in trading halt over listed firms spikes both in 2008 financial crisis period and 2015 stock market crash.Firms who has stock pledged faced the risk of close out,hence there is a link between stock pledge and stock liquidity.Also,firms has large scale stock pledge has demonstration effect.Given these characteristics,I maintain that study of liquidity contagion and Chinese stock market characteristics under the set of stock market extreme downside is essential.Due to liquidity dry up usually appears in extreme fluctuation,I focus on liquidity contagion under the set of extreme downside.Understanding the internal rules of liquidity commonality and liquidity spiral under the set of extreme downside is valuable to SEC and other supervision departments,for they can provide more precise guidance and lay down regulations to investors.This thesis can be divided into four aspects:First,I analyze the status quo of Chinese A-listed stock markets' extreme downside.According to the trading data from January 2008 to December 2019,besides the 2008 financial crisis and 2015 market crash,there are still sizable extreme downsides trading days in other trading periods.Compared to the normal trading days,extreme downsides days show that the major parts of daily returns are below zero.Moreover,extreme downsides days show more fluctuating and less ample liquidity.We define liquidity commonality through two folds,stock liquidity commonality and market liquidity commonality.These two aspects share the same traits.Compared the extreme downsides with normal trading days and the whole sample,both stock liquidity commonality and market liquidity commonality are stronger.Via correlation analysis and regression analysis,I study the relation between liquidity shocks and liquidity commonalty(both stock level and market level)according to the whole sample and extreme downside sample.The empirical results show that illiquidity shocks exacerbate the level of both stock and market liquidity commonality.Second,I carry out the research of liquidity spiral though theoretical analysis and empirical studies.I unfold the process of liquidity spiral though BP model.Furthermore,I analyze the relation between illiquidity shocks and liquidity spiral via correlation analysis and regression analysis.The results show that illiquidity shocks exacerbate degree of liquidity spiral.Third,I conduct the research of Chinese A-listed stock markets characteristics and liquidity commonality under the set of extreme downside.There are daily price limits,frequent trading halts phenomenon and large scale of stock pledge in Chinese A-listed stock markets.According to the data of January 2008 to December 2019,this section presents the characteristics of upper price limits,down price limits,trading halts and stock pledge.In extreme downside There are more firms hit the price limits;the number of firms under trading halts spikes in 2008 financial crisis and 2015 market crashes;stock pledge does not show clear relation with market extreme downside.Next,I focus on the relation between these characteristics and liquidity commonality.Under the situation of extreme downside,the very firms hit the down price limits shows stronger liquidity commonality.The longer firms are in trading halt condition,the weaker liquidity commonality is.This result could be caused by the construction method of liquidity variable,for Amihud liquidity variable only contains the information of trading days.Stock pledge shows unsignificant relation with liquidity commonality.As for market level of liquidity commonality,more firms hit the down price limits,the stronger liquidity commonality are under the extreme downside.Trading halt shows little effect on liquidity commonality.Stock pledge presents little effect on market level liquidity commonality.Fourth,I conduct the research of Chinese A-listed stock markets characteristics and liquidity spiral under the set of extreme downside.According to the data of January 2008 to December 2019,firms hit the upper limits have weaker liquidity spiral level.Moreover,the more times a firm hit the upper limits,the negative realation beteewn liquidity spiral and price limits are stronger.Meanwhile,hitting low price limits enhances the liquidity spiral.And the more times a firm hit the low limits,the positive realation beteewn liquidity spiral and price limits are stronger.Trading halt shows little effect on liquidity spiral.Stock pledge presents little effect on market level liquidity spiral as well.Inspired by previous literature,this thesis has the following contributions:First,this thesis views liquidity contagion under extreme downside from two perspevtives,which are liquidity commonaluty and liquidity spiral.I lay out the characteristics of liquidity commonality,both market level and stock level,of Chinese A-listed stock markets.Also,this paper studies the impact of liquidity shcok on liquidity commonality.Second,this paper studies liquidity spiral from both perspectives of theoretical model and empirical research according to Chinese stock market.Based on BP model,this theis unfolds the process of liquidity spiral under the set of market extreme downside.Inspired by these two theoretical models,this paper also studies the characteristics of liquidity spiral according to trading data.Also,this paper studies the impact of liquidity shcok on liquidity spiral.Third,this paper takes special regulation of Chinese A-listed stock market into consideration.Via correlation analysis and regression analysis,this paper studies the impact between price limit,trading halts and stock pledge on liquidity contagion respectively under stock market extreme downside.These empirical results could help related regulation supervisory department to have a better understanding of liquidity contagion under market extreme downside.Consequently,they can stabilize the stock marlet liquidity level in crashes.