Volatility Control Mechanisms : The International Experience and the Evidence from Hong Kong

This working paper was written by Kalok Chan (Chinese University of Hong Kong Business School), F.Y. Eric Lam (Independent Researcher)*, Giorgio Valente (Hong Kong Institute for Monetary and Financial Research) and Siyuan Wu (Chinese University of Hong Kong Business School).Trading venues have adopted volatility interruption measures to protect investors from extreme price gyrations and disorderly markets. Among such measures, Volatility Control Mechanisms (VCMs) are implemented among major international security markets. After reviewing the institutional details of VCMs, this study empirically investigates the impact of VCMs to Hong Kong’s stock market. Our results show that VCMs are able to curb further price swings. We also find that there is a reduction in the effective bid-ask spreads, and an increase in the depth and trading volume when trading is resumed after the cooling-off period. Furthermore, both difference-in-difference regression (DID) and regression discontinuity design (RDD) analysis show that the improvement in liquidity is statistically significant, especially in terms of the effective bid-ask spreads and depth.* This paper was written while F.Y. Eric Lam was a Senior Manager at the Hong Kong Institute for Monetary and Financial Research