Short Selling And Asset Pricing:An Empirical Study Based On China Margin Trading System

Short selling is an important trading system,which has an important influence on asset prices.Stocks can be overpriced when short-sale constraints bind.Loosening short selling can inhibit stock prices bubbles(Miller,1977;xiong and stein,2002).However,when the stock prices falls,the industry often accuses short sellers of causing stock prices to collapse by amplifying negative news and using insider information to manipulate stock prices and create panic in the market.China launched a pilot scheme in March 2010 to lift the ban on short-selling and margin trading for stocks on a designated list.This is a major financial innovation,which marks the formal entry of China's capital market into the "bilateral market" era.The introduction of the short selling mechanism allows investors with different views of the market to fully express their opinions,which can effectively improve the price discovery efficiency of the market.However,in 2015,a very large fluctuations in China A stock market,led to a rare crash.Subsequently,the media and the industry have accused the sellers is the stock market crash of arch-criminal.Whether short selling has caused the stock market crash or not has caused intense controversy.This paper deeply analyzes the effect of short selling on the stock prices from the three perspectives: does short selling risk factor have the function of risk premium;short sellers trading strategies;short sellers information channel,in order to answer the question of whether short selling can cause the stock market crash or not.Firstly,this paper uses the portfolio method and Fama-MacBeth regression to test the relationship between short interest and stock expected returns,and the result shows that the short interest is negatively related to the stock expected returns under the condition of controlling other factors.By buying a portfolio with a low short interest and selling a high short interest,the excess returns can be obtained,which shows that high levels of short interest predict negative abnormal returns.Then,we further analyze the reasons why short interest can predict stock returns.According to the efficient market theory and asset pricing theory,market arbitrage can correct asset mispricing,under the circumstance of short selling is not restricted by the market.The levels of short interest reflects the risk of the stock itself.Therefore,this paper constructs a short selling risk factor,and finds that short selling risk factor has a certain role in risk pricing.Market performance is the result of investor's trading behavior.Then,this paper examines the trading strategies of short sellers in China's A-share market and the influence of different factors on short sellers' trading strategy.The study found that short selling in the A-share market adopted a trend trading strategy,that is,to increase the short selling when the stock prices falls,and to reduce the short selling when the stock prices rises.Furthermore,the difference of short selling strategy under different market conditions is studied.It is found that the trend trading strategy of short sellers tends to weaken in bull market,while in bearish market,trend trading is strengthened.Thirdly,the impact of external shocks on short selling strategy is studied.The research shows that when the uncertainty of economic policy increases,investors reduce short selling in order to reduce transaction risk.Finally,for the accusations that short sellers are involved in insider trading,this paper examines the source of the information advantage of short sellers.First,this paper examines whether the short sellers are informed traders and the study finds that the short sellers in the A-share market are informed traders.Secondly,this paper systematically studied the changes in the short selling volume before and after the announcements of the company's major bad news(insider reduction,analyst downgrade,performance forecast loss,profit less than expected,trading halts),and the study found that before the announcement of bad news,the amount of short selling increased significantly,the greater the stock prices fell after the announcement,the greater the amount of short selling before the announcement.Short sellers show exceptional time trading ability to conduct surprise deals three days before bad news announcement.This shows that in the A-share market,short selling information from the insider information.