Abstract
Using difference-in-differences method, this paper examines the effect of the introduction of short selling in the Chinese stock market on the speculative trading of underlying stocks and makes a further exploration of the cause from the perspective of the changes in shareholder structure. It is found that speculative trading of underlying stocks is significantly decreased after short selling is introduced, and the speculation of stocks with low market value and low idiosyncratic volatility is increased more than those with high market value and high idiosyncratic volatility. Leaving the short selling markets of some small and institutional investors, who prefer to speculative trading, are able to partially and well explain these study results.
Highlights
Financing purchase and securities short-selling are two forms of securities credit transaction
Using difference-in-differences method, this paper examines the effect of the introduction of short selling in the Chinese stock market on the speculative trading of underlying stocks and makes a further exploration of the cause from the perspective of the changes in shareholder structure
It is found that speculative trading of underlying stocks is significantly decreased after short selling is introduced, and the speculation of stocks with low market value and low idiosyncratic volatility is increased more than those with high market value and high idiosyncratic volatility
Summary
Financing purchase and securities short-selling are two forms of securities credit transaction. Affected by the world financial crisis, Chinese stock market experienced a long down market lasting for more than four years from August 4th, 2009 to March 12th, 20142 During the period, both Shanghai and Shenzhen Security Exchange simultaneously announced new lists of underlying stocks that are eligible for short selling three times. Hong and Stain’s [3] theoretical model demonstrates that short selling constraints will cause stock price crash and aggravates market volatility when the market is in a down trend Some authors confirm these theoretical results by empirical analysis [4] [5]. We are the first time to directly examine the effect of short selling on the speculation using the natural experiment of gradually expanding the number of margin-trading underlying stocks in China.
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