The Research On The Effects Of Price Stabilizing Mechanism On China Stock Market

Price stabilizing mechanism is used by securities exchanges and regulators tolimit excessive price volatility of a stock or the whole security market, and it is animportant part of the market trading mechanism. Price limits, firm-specific tradinghalts and market-wide circuit breakers are the mostly used price stabilizingmechanisms in the exchanges. Price limits, as the major mechanism of the ChinaA-share stock market, is quite common in the emerging markets as well. Empiricalstudy and agent-based computational finance are used to study the effects of pricestabilizing mechanism on China stock market.Firstly, this paper focuses on the empirical study of four effects: volatilityspillover effect, trading interference effect, delayed price discovery effect and magneteffect, it turns out that, using the existed data and methods, it’s not able to judge thatwhether price limits can induce volatility spillover effect, or upper limits can inducetrading interference effect, or down limits can induce delayed price discovery effect.Only the delayed price discovery effect and the magnet effect of upper limits areproved, the trading interference effect and magnet effect of down limits are notsupported. Then following a model of order-driven stock market, this paper developsan artificial stock market containing the special trading mechanism and supervision ofChina stock market, which can mimic the price behavior of the stocks that frequentlytouch the price limits. By simulating under different price limits and without pricelimits, the result shows that both upper limits and down limits can induce volatilityspillover effect, and upper limits can induce delayed price discovery effect; the widerthe price limits is, the larger the volatility becomes, the better the liquidity is and thehigher the price discovery efficiency is; after being raised to10%, even if the pricelimits is raised wider, the volatility, liquidity and price discovery efficiency won’tchange significantly; by adding the trading halts mechanism, there aren’t significantchanges in the volatility, liquidity and price discovery efficiency of the market.