Short Selling Restrictions On Stock Return Rate And Trading Volume

Short sale is considered to induce abnormal price volatility, which is restrictedby nearly all countries' stock exchanges and completely forbidden by Chinesemarket. The correlation between returns and volatility is found positive fromresearches along the world markets and Karpoff desserts the positivecorrelation is likely to stem from short sale constraints. His argument goes asfollows: when the market is going up, new buy orders, reflecting either public orprivate positive signals, are placed and trigger trades. Consequently, pricesadjust upward while trading volume is large. On the other hand, when themarket goes down, short sale constrains inhibit the placement of sell orders.This reduces trading volume. In Hong Kong stock exchange, some shares, i.e.,Red chips and H shares, closely related to inner land are both listed andtraded in Hong Kong market and are permitted to be short sold. Comparedbetween the shares correlation from Hong Kong, Shanghai and Shenzhenmarkets, the coefficients of shares from Shanghai and Shenzhen stockmarkets are obviously higher than those of red chip shares. And the differencebetween them is correlated to the difference on constraints on short sale.