Research On Liquidity Risk Of NEEQ Market—Based On GARCH-VaR Model

As a unique product of China’s Over-the-Counter(OTC) market, National Equities Exchange and Quotations(NEEQ) was initially established to solve corporate shares circulation problems of STAQ and NET systems. In order to solve capital-raising dilemma of minor enterprises, NEEQ was reformed in 2006. NEEQ experienced its first expansion in 2012 with a rapid increasing number of listed companies and circulation stocks. After finishing nationwide expansion in 2014, NEEQ turned to be a significant composition of China’s capital market without doubt. Especially after implementing Market Making System in NEEQ, securities brokers, investors and enterprises actively flooded into the market. Listed companies and total market value set new records consistently and brought unprecedented prosperity into NEEQ.On June 31st 2015, NEEQ officially became independent of OTC market and covered by floor trading market. Until the end of 2015, listed companies in NEEQ were up to 5129 and total market value was over 2.46 trillion. In May 2016, NEEQ will carry out hierarchical management and listed companies will be divided into foundation enterprises and creation enterprises. Based on different levels, diverse supervision will be implemented. Hierarchical management sets a good fundament of transfer mechanism. At the present stage, NEEQ absorbs nationwide companies. Once meet standard requirements, companies could enter NEEQ and start stock trade. However, although with quick elevation of market volume and trade activity, the whole market still lacks of liquidity and faces great liquidity risk. Along with the improvement of market position in capital market, more and more capital will flood into NEEQ in the short future. Under the development background, deeply analyzing liquidity risk features of NEEQ and putting forward reasonable management suggestions are meaningful to explore NEEQ’s function of corporate development, price discovery as well as resources allocation.Based on acquaintance of current transaction system of NEEQ, the thesis builds up three types of liquidity indexes from the perspective of market spreads, market depth and comprehensiveness and horizontally as well as vertically analyses liquidity features of NEEQ. Then, GARCH model is used to estimate liquidity volatility of sample stocks and to observe long-term features of market liquidity risks. Based on GARCH model, the paper develops La-VaR model to achieve more accurate evaluation. According to La-VaR estimation of sample stocks, the paper deeply analyses short-term features of liquidity risks.Research results show that trade volume of NEEQ skyrocketed in 2014 after a low trade volume time when it was firstly founded. Its liquidity risks fiercely fluctuate and have a remarkable correlation with industry categories and trading types in the long term. In addition, liquidity risks occupy large proportion in market risks and is dominated by exogenous liquidity risks, which indicates that market factors would easily cause liquidity change compared with investor’s behavior in the short term. In a word, in order to improve liquidity and reduce liquidity risks of NEEQ, quality improvement of listed companies, hierarchical management and Market Making System should be reinforced accordingly.