Mispricing, Short Selling Efficiency And Excess Market Returns

The prediction of stock market returns is one of the core issues in finance,and the interpretation and prediction of stock market returns has been a common concern in the industry and academia.At the macro level,the stock market is a barometer of the economy and the market return reflects the operation of the macro economy,while at the micro level,the stock return reflects not only the financial status of listed companies but also the sentiment of investors.Therefore,the investigation of the prediction method of market return is not only important for the regulator to grasp the overall operation of the market,improve the pricing efficiency of the market and avoid systemic risks,but also for private investors to make rational investments and for enterprises to improve their management level.This thesis links the short selling mechanism and mispricing,and proposes a factor that can predict the excess returns of the Chinese A-share market-short selling efficiency(SSE).In terms of measuring the extent of mispricing,this thesis draws on Stambaugh et al.(2012)to construct a mispricing score(MISP)that combines ten domestic market anomalies and constructs an indicator for measuring the extent of mispricing in the A-share market.Drawing on the construction method of Chen et al.(2022),this thesis selects data on the Chinese A-share market from March 31,2010 to March 31,2022 as the sample interval,and combines the abnormal financing rate and mispricing to construct short selling efficiency(SSE),an indicator that can significantly and negatively predict market excess returns.In the empirical part,this thesis verifies the predictive ability of SSE on market excess returns and draws the following conclusions.First,SSE has a significant negative predictive power for market excess returns in the second,third and fourth months of the future,while it has no negative predictive power in the first month of the future.This suggests that the information advantage of informed traders embedded in the SSE does not begin to gradually reflect in the market until one month later.Second,the predictive power of the SSE is best in the third month ahead,suggesting that the informational advantage of short sellers is fully unleashed in the market in the third month ahead.Third,the SSE has a longer forecasting horizon and a larger forecasting coefficient than the indicators measuring the level of short selling,indicating that the SSE contains more valid market information.In the heterogeneity analysis section,this thesis distinguishes two periods:the high and low volatility periods of the market,and before and after the reform of the securities financing and repayment system,and conducts separate empirical studies and obtains two conclusions.First,SSE has better forecasting ability in high-volatility periods,which indicates that the information advantage of short sellers comes from high-volatility periods.Second,the SSE predictability is significant before and after the bond reform,but the prediction coefficient decreases after the bond reform,which indicates that the reform "T+1" trading model limits the role of the short-selling in adjusting market mispricing.The research in this thesis shows that SSE indicators constructed based on the Chinese stock market are able to predict market excess returns and can be used as reference information for investors to make asset allocations;the research in this paper also provides further evidence of the role played by the securities financing system in correcting market mispricing,and therefore can also serve as a factual basis for regulators to modify market rules.The contributions of this thesis are mainly in two aspects.Firstly,this thesis constructs a mispricing score(MISP),a suitable indicator for measuring the extent of mispricing in the domestic A-share market,based on the methodology proposed by Stambaugh et al.(2012)for constructing mispricing scores by combining market anomalies,and validates the validity of this indicator,enriching the domestic research on mispricing factors.Second,using A-share market data for the first time,this thesis links short selling mechanism and mispricing,and proposes a predictor that can effectively predict market excess returns-short selling efficiency(SSE).