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Time varying price discovery of the New Third Board market in China: does the market-making system help?

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  • Gaoxiu Qiao
  • Pengfei Zhao
  • Weiping Li

Abstract

This paper examines whether the market-making system helps to improve the price discovery ability of New Third Board (NTB) market in China. We first estimate the time-varying coefficients error correction models, then apply common factor weight method to quantify the time-varying price discovery contributions, and finally explore the impacts of trading volume and volatility to price discovery contributions. Empirical results show that both markets have time-varying characteristic in terms of the magnitudes and directions of the equilibrium price adjustment due to error correction term. The Shanghai Composite Index, SZSE Component Index, and SME Index are found to lead in price discovery, while NTB exhibits the leadership on the GEM Index. Volume and volatility have significant influence on the price discovery contribution. The NTB contribution is positively related to its own trading activity, negatively related to the trading activity of Shanghai and Shenzhen stock markets, while negatively correlated with the volatility of both markets. In comparison, trading activity of SZSE Component Index and volatility of GEM Index have the greatest negative impacts on the contribution of NTB market. As an important part of China’s multi-level capital market, the pricing mechanism of the NTB market needs further to be improved.

Suggested Citation

  • Gaoxiu Qiao & Pengfei Zhao & Weiping Li, 2019. "Time varying price discovery of the New Third Board market in China: does the market-making system help?," Applied Economics, Taylor & Francis Journals, vol. 51(45), pages 4902-4919, September.
    • Handle: RePEc:taf:applec:v:51:y:2019:i:45:p:4902-4919
    DOI: 10.1080/00036846.2019.1602711
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    Cited by:

    1. Liwei Jin & Xianghui Yuan & Li Peiran & Hailun Xu & Feng Lian, 2023. "Option features and price discovery in convertible bonds," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(3), pages 384-403, March.
    2. Zhang, Xiaotao & Wang, Ziqiao & Hao, Jing & He, Feng, 2022. "Price limit and stock market quality: Evidence from a quasi-natural experiment in the Chinese stock market," Pacific-Basin Finance Journal, Elsevier, vol. 74(C).

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