Empirical Research Of The Short-selling And Margin-trading's Effect On Price Discovery In China

Short-selling and margin-trading is a securities trading system of the world's major stock markets for years, which plays an important role in the development of securities market, but its leverage is also thought to be one of the important factors that the stock market is not stable. As an emerging stock market, China launched the short-selling and margin-trading on March 31, 2010, marking the formal introduction of short selling system in Chinese stock market. After five years of development, does the price discovery function of short-selling and margin-trading performances well? From the perspective of the stock price discovery, this article did an empirical research on the impact of the short-selling and margin-trading using the historical transaction data of Shanghai and Shenzhen Stock Exchange. Firstly, using the targets stocks' adjustment events for event study analysis, the result confirmed the ‘short-selling constraint leads to the stock price's overvalue' hypothesis. The introduction of short-selling had a significant effect on the stock price's discovery. Then, calculated the target stocks' change of the return distribution and pricing efficiency indicators before and after the start of short-selling and margin-trading, and carried on statistical comparative analysis. Given the short-selling and margin-trading plays fundamentally different in stock price behavior mechanism, coupled with a serious imbalance in the size of short-selling and margin-trading in our country, this paper would combine the short-selling and margin-trading detailed transaction data on the underlying stock with return distribution characteristics and pricing efficiency indicators to do an fixed effects panel data regression analysis, which deeply discussed the relationship between short-selling,margin-trading and the stock price discovery. The results show that short-selling help suppress the soar of stock price, but promoted the further decline in stock prices, and margin-trading exacerbated the rise of stock price, the short-selling and margin-trading did not improve the underlying stocks yield distribution characteristic of “rush thick tail”; pricing efficiency increased, including the role of short-selling is greater than the role of margin-trading on the stock pricing efficiency.