Short-Selling, Margin-Trading, and Price Efficiency: Evidence from the Chinese Market

48 Pages Posted: 25 Aug 2012 Last revised: 24 Aug 2013

See all articles by Eric C. Chang

Eric C. Chang

University of Hong Kong - School of Business

Yan Luo

Fudan University

Jinjuan Ren

University of Macau

Date Written: August 24, 2013

Abstract

China launched a pilot scheme in March 2010 to lift the ban on short-selling and margin-trading for stocks on a designated list. We find that stocks experience negative returns when added to the list. After the ban is lifted, price efficiency increases while stock return volatility decreases. Panel data regressions reveal that intensified short-selling activities are associated with improved price efficiency. Short-sellers trade to eliminate overpricing by selling stocks with higher contemporaneous returns following a downward trend, and their trades predict future returns. In contrast, we find intensified margin-trading activities for stocks with lower contemporaneous returns, and these trades have no return predictive power.

Keywords: Short selling, margin trading, stabilization

JEL Classification: G12, G14, G15, G18

Suggested Citation

Chang, Eric Chieh C. and Luo, Yan and Ren, Jinjuan, Short-Selling, Margin-Trading, and Price Efficiency: Evidence from the Chinese Market (August 24, 2013). 25th Australasian Finance and Banking Conference 2012. Available at SSRN: https://ssrn.com/abstract=2135067 or http://dx.doi.org/10.2139/ssrn.2135067

Eric Chieh C. Chang

University of Hong Kong - School of Business ( email )

Meng Wah Complex
Pokfulam Road
Hong Kong
China

Yan Luo

Fudan University ( email )

No. 670, Guoshun Road
No.670 Guoshun Road
Shanghai, 200433
China

Jinjuan Ren (Contact Author)

University of Macau ( email )

Room 4079, E22, Faculty of Business Administration
University of Macau
Taipa, Taipa Nil
Macau
(853) 8822-4185 (Phone)

HOME PAGE: http://www.umac.mo/fba/staff/susanren.html

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