Price Limits, T+1 Settlement, and Volatility Clustering: A Direct Portability Test of Standard GJR-GARCH Specifications to China's A-Share Market

Abstract

This paper tests whether standard GJR-GARCH and DCC specifications calibrated on developed-market equity markets can be directly transplanted to China's A-share market, where two structural constraints — a ±10%/±5% daily price limit and T+1 settlement — fundamentally alter the volatility generating process. Using 2015–2025 daily data for eight CSI 300 sector indices (N = 2,695) and a panel of 18 AH dual-listed company pairs as a natural experiment, we document three systematic distortions. First, price limits truncate the return distribution and induce artificial autocorrelation in squared residuals, causing baseline GJR-GARCH to overestimate volatility persistence (mean α+γ/2+β = 0.9857 for A-shares vs. 0.9905 for matched HK counterparts, ∆ = -0.0048). Second, T+1 settlement creates an asymmetric liquidity shock — investors cannot exit positions acquired on the same day after an adverse price move — inflating the leverage coefficient γ beyond its standard 'bad news' interpretation (mean ∆γ = -0.0577 across AH pairs; 16/18 pairs reject H0: γ_A = γ_H at p<0.05). Third, VaR backtests confirm that unmodified standard GJR-GARCH specifications fail Kupiec's unconditional coverage test in 100% of sector-level cases. The aggregate GARCH Portability Index averages 0.553 (on a 0–1 scale), well below the 0.80 threshold for model transportability. We propose two minimal corrections — a limit-hit indicator in the variance equation and a T+1 asymmetry adjustment in the leverage term — that reduce persistence bias and improve VaR coverage, providing a blueprint for institutional practitioners deploying standard risk models in Chinese equity markets.

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