Short Selling And Stock Return Forecasting

On March 31,2010,the China Securities Regulatory Commission officially launched the A-share margin trading pilot,and the short selling mechanism was introduced into the Chinese stock market,which also marked the further improvement of China’s capital market system.However,the occurrence of the stock disaster from November 2014 to January 2016 made many media and the industry believe that short sellers are the culprit of the stock market shock,and short sellers used short selling to suppress the stock price,resulting in the occurrence of stock disaster,Subsequently,the regulatory authorities carried out strict control over short selling.However,there is no conclusive conclusion as to whether restricting short selling can increase the stability of the market.On the one hand,many scholars’ empirical and theoretical findings show that the introduction of short selling mechanism makes pessimistic investors’ views reflected in the stock price in a timely manner,thus reducing mispricing and improving market stability.On the other hand,some scholars believe that short sellers,as informed traders,can use short selling to manipulate the stock price when the stock price falls,It is easy to cause the fluctuation of stock price and increase the frequency of extreme returns.Through sorting out the relevant literature,many foreign studies have shown the negative correlation between short selling volume and stock return,that is,stocks with large short selling volume in the early stage have lower future return,and short selling behavior has predictability on stock future return.Miller(1977)’s classic "stock price overvaluation hypothesis" explains this phenomenon:there are differences of views among investors,Every investor holds different views on assets.Due to the short selling restrictions,investors who retain the price higher than the asset market price cannot express their negative views and choose to leave the market,so the stock price tends to reflect the most optimistic expectations in the market,which eventually leads to the overvaluation of the stock price.The short seller can identify the overvalued stocks.For investors,the short selling rate is a signal,It reflects that the company has a negative event.The higher the short selling rate,the more likely the future yield of the stock will fall.Many subsequent empirical research conclusions also support Miller’s conjecture,but most of them are evidence from mature foreign capital markets.The construction of domestic short selling mechanism started late.After the implementation of the margin trading system,the current research on short selling restrictions and asset pricing mainly focuses on the promotion of margin trading,stock market volatility,and stock price discovery,The number of studies on stock return prediction in margin trading is small,and the existing research time is early,and data resources are scarce.In recent years,with the further opening of margin trading,short selling in China has developed rapidly,and the balance of margin trading and the number of underlying stocks have started to increase in a blowout.The research conclusions on short selling rate and stock returns also need to be supported by more representative data.Based on the above,this paper uses portfolio analysis and regression analysis to study the relationship between China’s stock short selling rate and future return through the daily margin trading data of China’s A-share market,and constructs a new short selling factor by imitating Fama-French’s method of constructing risk factors,trying to explain why short selling rate can predict stock return from the perspective of short selling risk premium.According to the empirical results,the conclusion of this paper is:First,there is a significant negative correlation between the stock short selling rate and the future return rate in China’s A-share market.The result of portfolio analysis shows that the excess return can be obtained by buying the stock portfolio with low short selling rate and selling the stock portfolio with high short selling rate.Then,the Fama-MacBeth regression method and panel data regression model are used to control several factors that may have an impact on stock returns,and the effects of the past short selling rate on the return and the short selling rate on the future return are tested respectively.The results verify that the short selling rate has a significant explanatory effect on the cross sectional return of stock tickets,and the short selling rate can predict the future negative return of stocks.Second,short selling risk factor has significant risk pricing effect.By constructing the portfolio and adjusting the excess return rate of the portfolio with the Fama-French three-factor model and the four-factor model constructed in this paper,the comparison shows that the R2 value of the regression model adjusted by the four-factor model is significantly increased compared with the three-factor model.The GRS statistic is used to test whether the joint intercept of the model is significantly 0,and it is also found that the short selling risk factor has good explanatory power.In response to the above conclusions,this paper puts forward policy recommendations:First,the trading behavior of short sellers has the ability of information identification,which can identify the overvalued stocks and help their prices converge to the internal value,which can increase the market stability.Therefore,the regulatory authorities should gradually relax the constraints on short selling,such as increasing the number of margin trading targets,reducing the margin trading fee rate,and reducing the guarantee maintenance ratio.Second,at present,the securities companies have a high difficulty in margin trading and the channels for margin trading are insufficient.The regulatory authorities should increase the number of members of margin trading to make the business more market-oriented and improve the efficiency of margin trading.Third,the regulatory authorities should strengthen the centralized management of investment institutions,strictly control irrational investment behavior,and introduce laws and regulations to restrict the subject matter of margin trading and "bypass" behavior,prevent the market from overheating,and control the market risk as a whole.