[Factors That Affect Share Price Volatility And Trading Volume In Hong Kong Stock Exchange]

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ACKNOWLEDGEMENT

I would take this opportunity to thank my research supervisor, family and friends for their support and guidance without which this research would not have been possible.

DECLARATION

I, [type your full first names and surname here], declare that the contents of this dissertation/thesis represent my own unaided work, and that the dissertation/thesis has not previously been submitted for academic examination towards any qualification. Furthermore, it represents my own opinions and not necessarily those of the University.

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ABSTRACT

After examining both the inter-day and intraday return volatility of the Hong-Kong Composite Stock Index, it was found that the open-to-open return variance is consistently greater than the close-to-close variance. Examining the volatility of inter-day returns and variance ratio tests with five-minute intervals reveals an L-shaped pattern, or more precisely, two L-shaped patterns, starting with a small hump during both the morning and the afternoon sessions, with the morning session having a much higher inter-day volatility than the afternoon session. This L-shaped inter-day volatility is supported by the similarly shaped intraday volatility pattern. This result suggests that the high volatility of intraday returns for the market open is not entirely due to the trading mechanisms (call auction in the market opening) but also due to both the accumulated overnight information and the trading halt effect. The five-minute breaks after the auction and blind auction procedures are the two major driving forces which exaggerate the high intraday volatility observed at the market open.

Keywords: Inter-day and intraday volatility, order driven market, Hong-Kong Stock Exchange

TABLE OF CONTENTS

ACKNOWLEDGEMENTII

DECLARATIONIII

ABSTRACTIV

CHAPTER 1: INTRODUCTION1

CHAPTER 2: LITERATURE REVIEW4

Trading Hours9

Trading Volume and the Absolute Value of Price Changes10

Trading Volume and Price Change11

Trading Volume and Conditional Volatility12

Causal Relation between Trading Volume and Stock Price Changes13

The Implementation of a Price Limits System14

The Occurrence of a Financial Crisis15

The Changes in Regulatory Framework16

Technological Advances17

Other Non-overlapping Sub-Samples Studies18

CHAPTER 3: STATISTICAL METHODOLOGY, TRADING SYSTEMS AND DATASET19

Trading Systems19

Dataset21

Returns22

CHAPTER 4: EMPIRICAL ANALYSIS24

Interday Return Volatility24

Volatility in Trading and non-Trading Periods26

Intraday Return and Volatility28

CHAPTER 5: CONCLUSION32

REFERENCES35

CHAPTER 1: INTRODUCTION

A very important issue in market microstructure analysis is the interaction between trading procedures and security price formation. The latter is associated closely with the evolution of security's return volatilities. Empirical studies on the interdaily evolution of return volatilities typically find that daily open-to-open volatility is higher than daily close-to-close volatility. Three general explanations have been offered for this phenomenon: the difference in trading mechanism between the market's open and close (Amihud and Mendelson, 1987), the monopoly power of the specialist (Stoll and Whaley, 1990), and the long halt of trade before the market's open (Amihud and Mendelson, 1991).

In this article, we examine the behaviour of both interday and intraday return volatility of the Hong-Kong Composite Stock Index in order to shed additional light on the issue. There have been no empirical studies made on the microstructure of the Hong-Kong stock markets using intraday data. China's stock exchanges are relatively new players amongst the world's financial markets. The two official stock exchanges, the ...