Empirical Analysis Of The Impact Of Short Selling Mechanism On The Stock Market And Arbitrage Strategies

Short selling mechanism is almost produced with the stock market inwestern countries. From the appearance of short selling mechanism, domesticand foreign scholars have conducted a lot of research, but the results aredifferent. Some people think that short selling mechanism would exacerbate thevolatility of the stock market. Others consider that it not only would notaggravate the volatility, but reduce the volatility of the stock market. The stockmarket of China is lack of short selling mechanism for more than20years.With the development of the economy and the stock market, the demand ofpeople for diversified investment is more and more strong. Short sellingmechanism is the inevitable choice for the development of our country’s stockmarket. March and April2010, our stock market launched a pilot of margintrading firstly, and then launched CSI300index stock futures which mean thatsince than our stock market had short selling mechanism. The first part of thispaper analyzes the impact of short selling mechanism on the volatility of ourstock market through two different kind of empirical method. One way is to useco-integration and Granger causality test to study on the relationship betweenshort selling and the volatility, the result finds that short selling mechanismneither increases nor reduces the volatility of the stock market. Anther isEGARCH model, finding that the short selling mechanism reduces the volatilityof the stock market and plays a role in stabilizing the market.The second part mainly introduces three different arbitrage strategieswhich are brought about by short selling mechanism. The first strategy is pairstrading between two stocks based on their highly correlated historical data.When the price of the two stocks have a large deviation, investors can borrowthe stock from broker which is overestimated and sell short, then buy anotherstock which is undervalued. Until they regain the balanced relation, do thereverse trading for spread income. The second strategy is cross-market arbitrage between ETF fund and a basket of stocks. When the net value and themarket value of ETF fund are not inconsistent, investors have the opportunityto make risk-free arbitrage by conversing ETF fund and a basket of stocks inthe primary and secondary market. The third strategy is spot-future arbitrage, touse the unreasonable pricing between CSI300stock index futures andcorresponding index to make arbitrage.