Abstract: Analyzing the characteristics of financial data and pointing out the drawbacks of GARCH models,the paper describes the volatilities of daily stock return by stochastic volatility model and employs GMM to estimate the parameters in the model.In the final,the paper carries out a emprical analysis of daily stock return volatilties in Shanghai stock market to figure out the effects of price limits posed on daily price of stocks listed in Shanghai Stoke Exchange on volatility and distribution pattern of stock return.

Key words: fat tail, volatility clustering, GARCH, stochastic volatility, price limits