The microstructure of the Chinese stock market

The auction principles, clearance, settlement, and depository (CSD) facilities of the Chinese stock market are described. An autoregressive model is found to characterize the time series properties of stock returns and volatility in the Shanghai market reasonably well. The extremely high volatility of the market is explained well by its lagged volatilities along with trading volumes. Further scrutiny reveals that trading volumes and volatility are endogenous in a vector autoregressive process (VAR) system for the Shanghai Composite Index (SHCI). Foreign shares are found to behave differently from domestic shares in several respects.