Price limits, market efficiency and market volatility

This paper tests the martingale hypothesis and the return volatility under the price limits for 30 most actively traded A stocks in the Shanghai Security Exchange by proposing the model of GARCH (1, 1) with up-limit and down-limit dummy variables in both the mean and variance equations. The results show that 10% of price limit rate of Chinese security market at present has had an impact on the market efficiency and cannot reduce the market volatility. Accordingly, the author suggests that the 10% of price limits should be cancelled or relaxed.