Chinese Market Microstructure, Circuit Breakers and Herd Behaviour

This thesis examines the empirical features of the failed market-wide circuit breakers in the Chinese stock market. The research provides market microstructure evidence on why these Chinese market-wide circuit breakers failed to deliver the intended outcomes when prices fell sharply. It emerges that the herd behaviour amongst market participants explains the ineffectiveness of the circuit breakers. The evidence documented here contributes to the scant literature on the consequences and implications of stock market regulations through intraday stock price dynamics and traders’ behaviour. In doing so, the thesis aims to assist researchers, investors, regulators and stock market policy-makers comprehend the complex trading environment in China with a view that alternative regulatory mechanisms can be developed to curtail market volatility. The first essay provides market microstructure evidence, including the price discovery, magnet effect and volatility spillover effects, on the failed market-wide circuit breakers in the Chinese stock market. The results for the event sample are compared with non-event samples which control for normal trading behaviour around information release but absent of trading halts. The study finds trading halts provide no “time-out” cushion given there is evidence of strong positive return autocorrelation on the days when circuit breakers were triggered. No improvement in the informativeness of stock prices occurred, given the smaller price contribution during halt compared to non-halt periods. Traders faced time constraints from impending trading halts which forced them to quickly close their positions as information asymmetry peaked, thus causing the price to accelerate towards its limit (a magnet effect) and triggering a subsequent halt. Volatility of within-stock spills over into post-halt and overnight non-trading periods. Conversely, cross-sectional volatility spillover between A- and B-shares increases in post-halt periods. Collectively, the empirical evidence justifies the abolition of market-wide circuit breakers by government policy-makers and/or regulators