Heterogeneous Beliefs And Private Information Arbitrages In The Short Sales And Margin Purchases On Chinese Stock Markets

Recently, short sales and margin purchases have enjoyed sound momentum. The interests revenues from the expectant credit operations, including short sales and margin purchases, have become the second largest source of revenues of China’s securities companies. However, after witnessing the "the biggest tragedy of short sales and margin purchases" related to JiangXi ChangJiu Biochemical Industry Co., Ltd, we found that this business implies potential risks. The short sales and margin purchases may bring different impacts to different types of market participants.This study investigated the heterogeneous beliefs in the short sales and margin purchases on Chinese stock markets. Firstly, two models about the relationships between the heterogeneous beliefs and asset prices are reviewed. Using a dataset of 338 stocks in 8 quarters, one of the results of the empirical studies is that there are heterogeneous beliefs between institutional investors and retail investors. Then the short-term relationship between the rate of change of the heterogeneous beliefs and stock returns is studied.The private information arbitrages are also studied. After the empirical studies using the relative panel data on Chinese stock markets, it is found that the degree of private information arbitrages is higher among the underlying stocks with higher ratios of margin purchases balance to tradable market cap. The existence of the heterogeneous beliefs between the institutional investors and the retail investors indicates that the retail investors have a stronger preference for the underlying stocks with higher ratios of margin purchases balance to tradable market cap instead of the ones with lower ratios. With the higher probability to be irrational noise traders for the retail investors, the market is relatively more easily to be misled and manipulated. Thus, the degree of private information arbitrages increases among these types of underlying stocks.By using the intermediate variable of institutional investors holding, this study successfully combines the heterogeneous beliefs and private information arbitrages in the short sales and margin purchases on Chinese stock markets, which provides a new perspective to better understand the features of short sales and margin purchases on Chinese stock markets.In addition, using the newest market data, a stable Vector Auto Regression Model among the stock returns, the rate of change of the balance of margin purchases and the rate of change of the turnover rate is established, the Impulse Response Function is analyzed and the Granger Causality Test is made among these three variables. The existence of the cointegration between the ratio of margin purchases balance to tradable market cap and the stock price is found, and a stable Vector Error Correction Model is established between these two variables.Based on the theory and empirical studies, we come up with policy suggestions related to the protection of the retail investors and the monitoring of the possible market manipulations and inside trades during the short sales and margin purchases activities.