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Short-selling, margin-trading, and price efficiency: Evidence from the Chinese market

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  • Chang, Eric C.
  • Luo, Yan
  • Ren, Jinjuan

Abstract

China launched a pilot scheme in March 2010 to lift the ban on short-selling and margin-trading for stocks on a designated list. We find that stocks experience negative returns when added to the list. After the ban is lifted, price efficiency increases while stock return volatility decreases. Panel data regressions reveal that intensified short-selling activities are associated with improved price efficiency. Short-sellers trade to eliminate overpricing by selling stocks with higher contemporaneous returns following a downward trend, and their trades predict future returns. In contrast, we find intensified margin-trading activities for stocks with lower contemporaneous returns, and these trades have no return predictive power.

Suggested Citation

  • Chang, Eric C. & Luo, Yan & Ren, Jinjuan, 2014. "Short-selling, margin-trading, and price efficiency: Evidence from the Chinese market," Journal of Banking & Finance, Elsevier, vol. 48(C), pages 411-424.
    • Handle: RePEc:eee:jbfina:v:48:y:2014:i:c:p:411-424
    DOI: 10.1016/j.jbankfin.2013.10.002
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    More about this item

    Keywords

    Short selling; Margin trading; Efficiency; Stabilization;
    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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