Regulatory Soft Interventions in the Chinese Market: Compliance Effects and Impact on Option Market Efficiency

37 Pages Posted: 3 Apr 2019

See all articles by Jimmy E. Hilliard

Jimmy E. Hilliard

Louisiana State University, Baton Rouge - E.J. Ourso College of Business Administration

Haoran Zhang

Auburn University, Harbert College of Business, Department of Finance, Students

Date Written: May 2019

Abstract

Securities Laws in China are administered by the China Securities Regulatory Commission (CSRC). The CSRC has great flexibility in administering securities laws since the committee represents the will of the state. Under the state‐controlled financial system, the CSRC works closely with state‐controlled financial firms and suggests, but does not mandate, actions to be taken in the equity market, especially during periods of extreme market stress. These suggestions, or soft interventions, have been used to block trades associated with short sales, significantly reducing short‐sales volume. With daily and intraday data, we investigate the impact of these interventions on put‐call parity and implied volatilities. There is overwhelming evidence of increased deviations from put‐call parity and changes in implied volatility after soft interventions. Our results are robust after allowing for bid‐ask spreads, taxes, transaction costs, and difference‐in‐differences comparisons with control securities in the Hong Kong market.

Keywords: Chinese market, soft interventions, options, efficient markets, put‐call parity

JEL Classification: G1, G13, G14

Suggested Citation

Hilliard, Jimmy E. and Zhang, Haoran, Regulatory Soft Interventions in the Chinese Market: Compliance Effects and Impact on Option Market Efficiency (May 2019). Financial Review, Vol. 54, Issue 2, pp. 265-301, 2019. Available at SSRN: https://ssrn.com/abstract=3364529 or http://dx.doi.org/10.1111/fire.12189

Jimmy E. Hilliard (Contact Author)

Louisiana State University, Baton Rouge - E.J. Ourso College of Business Administration ( email )

Department of Finance
Baton Rouge, LA 70803-6308
United States
225-578-7676 (Phone)
225-578-6366 (Fax)

Haoran Zhang

Auburn University, Harbert College of Business, Department of Finance, Students ( email )

Auburn, AL 36849
United States

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