Institutional Shocks and GARCH Mis-specification: Evidence from China’s 2016 Circuit Breaker Episode and AH Dual-Listed Pairs

Abstract

This paper examines whether standard GJR-GARCH volatility specifications remain structurally stable when subjected to abrupt institutional shocks, using China’s January 2016 market-wide circuit breaker episode as a natural experiment. The circuit breaker mechanism was triggered twice within four trading days of its introduction and was abolished on January 8, 2016, producing a sharply defined exogenous policy shock within a market already characterized by ±10% daily price limits and T+1 settlement. Using a three-layer empirical design combining Bai-Perron structural break tests, a difference-in-differences comparison against Hong Kong equity benchmarks, and a novel GARCH Portability Index applied to 18 AH dual-listed pairs, the paper documents systematic mis-specification in baseline GJR-GARCH(1,1)-t models. Structural breaks cluster around the circuit breaker dates, leverage asymmetries diverge significantly (mean Portability Index 0.553, below the 0.80 threshold), and baseline models fail Kupiec coverage tests in all 16 sectors. Augmenting with institutional friction terms improves VaR pass rates from 0% to 44%.

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