Effects of Short-Sale Constraints and Information Asymmetry on Index Futures Trading

Review of Finance, Volume 21, Issue 5, August 2017, Pages 1975–2005, Doi.org/10.1093/rof/rfw020

Posted: 9 Jul 2020

See all articles by Frank J. Fabozzi

Frank J. Fabozzi

EDHEC Business School

Ahmet K Karagozoglu

Hofstra University, Zarb School of Business; New York University (NYU) - Volatility and Risk Institute

Na Wang

Hofstra University - Frank G. Zarb School of Business

Date Written: 2017

Abstract

We analyze the effects of spot market short-sale constraints on derivatives trading using a unique Chinese stock market futures trading database. Due to short-sale constraints, investors’ pessimistic views on the underlying index can be expressed solely through short futures positions, while investors’ optimistic views are dispersed through their spot and futures trading. We hypothesize that trading of pessimistic investors (with net short futures positions) contains more information than that of optimistic investors. We document the negative volatility–volume relation is associated with pessimistic investors’ trading, which attenuates with less-restricted spot market short-sale rules. Large pessimistic investors’ net demand can predict future returns, but not the case for optimistic investors.

Keywords: short-sale constraints, stock index futures; investor optimism

JEL Classification: G11, G13, C53

Suggested Citation

Fabozzi, Frank J. and Karagozoglu, Ahmet K and Wang, Na, Effects of Short-Sale Constraints and Information Asymmetry on Index Futures Trading (2017). Review of Finance, Volume 21, Issue 5, August 2017, Pages 1975–2005, Doi.org/10.1093/rof/rfw020, Available at SSRN: https://ssrn.com/abstract=3628628

Frank J. Fabozzi

EDHEC Business School ( email )

France
215 598-8924 (Phone)

Ahmet K Karagozoglu (Contact Author)

Hofstra University, Zarb School of Business ( email )

Department of Finance
148 Hofstra University
Hempstead, NY 11549-1480
United States
(516) 463-5701 (Phone)
(718) 701-8331 (Fax)

HOME PAGE: http://sites.hofstra.edu/ahmet-karagozoglu

New York University (NYU) - Volatility and Risk Institute ( email )

44 West 4th Street
New York, NY 10012
United States

Na Wang

Hofstra University - Frank G. Zarb School of Business ( email )

134 Hofstra University
Hempstead, NY 11549
United States

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