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The impact of short-selling and margin-buying on liquidity: Evidence from the Chinese stock market

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  • Wan, Xiaoyuan

Abstract

We propose a framework based on limit order book to analyze the impact of short-selling and margin-buying on liquidity. We show that when short-sellers are perceived as informed, adverse selection may lead to uninformed traders withdrawing their limit orders. Given that the Chinese stock market has strong information asymmetry and a high proportion of uninformed traders, we predict that the pilot program launched in March 2010, which lifts restrictions on short-selling and margin-buying for a designated list of stocks, may have a negative impact on liquidity. We perform difference-in-differences tests and show evidence that allowing for short-selling and margin-buying indeed has a significantly negative impact on liquidity for stocks on the designated list. In particular, the negative impact on liquidity is more pronounced for stocks with high information asymmetry. Nevertheless, when short-selling volume dries up due to regulation changes in August 2015, i.e., the “T+1” trading rule on short-selling, we show that consistent with model predictions, lifting restrictions on short-selling and margin-buying has a positive effect on liquidity.

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  • Wan, Xiaoyuan, 2020. "The impact of short-selling and margin-buying on liquidity: Evidence from the Chinese stock market," Journal of Empirical Finance, Elsevier, vol. 55(C), pages 104-118.
    • Handle: RePEc:eee:empfin:v:55:y:2020:i:c:p:104-118
    DOI: 10.1016/j.jempfin.2019.11.003
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    4. Huang, Can & Huang, Hung-Yi & Ho, Kung-Cheng, 2024. "Media coverage and stock liquidity: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 665-682.
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    7. Zeng, James Si, 2021. "Does regulation of defensive tactics with mandatory rules benefit shareholders? Evidence from event studies in China," International Review of Law and Economics, Elsevier, vol. 66(C).

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    More about this item

    Keywords

    Short-selling; Margin-buying; Liquidity; Limit order book; Adverse selection; Information asymmetry;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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