|
|
|
| Short Selling Restriction and Return Predictability: Evidence from China's A-Share Margin Trading and Short Selling |
| GUO Biao, LIU Puyang, JIANG Yuan
|
School of Finance, Renmin University of China;
Citi Orient Securities Company Limited |
|
|
|
Abstract In the context of the stock market, margin trading is the phenomenon whereby investors pay a certain amount of margin to security companies, borrow a certain amount of funds to buy stocks, and return the funds with interest after a certain period. Accordingly, short selling refers to investors' borrowing and selling securities from securities companies and afterwards returning the securities with interest.
Margin trading and short selling have existed in mature stock markets in Europe, the United States, and Japan for many years. Through margin trading and short selling, informed traders can make better use of private information to increase the information content of stock prices and push stock prices to move closer to their intrinsic value. Arbitrageurs can also rely on margin trading and short selling for risk-free arbitrage, reducing stock mispricing (Miller, 1977) and improving overall pricing efficiency in stock markets.
In the literature, the ratio of margin trading and short selling is generally used to measure the market depth of margin trading and short selling. The relationship between stock returns and both margin trading and short selling is studied. A typical indicator is defined as the ratio of balance on margin trading/short selling and outstanding shares. However, it is possible that this ratio does not fully consider the transaction cost information. “Transaction cost” here refers to the time cost required to cover the margin trading and short selling amount. In contrast, the number of days-to-cover takes the impact of the turnover rate on the transaction cost of margin trading and short lending into account, which helps to determine the level of stocks' mispricing.
China's margin trading and short selling businesses are becoming increasingly mature. In March 2010, the China Securities Regulatory Commission launched an A-share margin trading and short selling business pilot program. To date, the program has been enlarged six times. With this expansion in scale, the balance of margin trading and short selling has also increased, rising from less than 13 billion RMB in 2010 to 1.02 trillion RMB by the end of December 2019. However, at the same time, the phenomenon of asymmetric transactions has been prominent. Typically, 98.85% of the trading balance is due to margin trading. This proportion has remained at almost 99% since 2014. Unlike margin trading transactions, short selling is still subject to many restrictions in China's A-share markets.
Based on the huge difference between margin trading and short selling in China's A-share markets, this paper extends the theoretical model of Hong et al. (2016) to identify factors that affect stock returns from margin trading and short selling, which are the short selling ratio and days-to-cover on margin trading. Furthermore, using the portfolio construction and Fama-MacBeth cross-sectional regression methods, this paper empirically tests these factors' predictive power. The sample includes 1,126 stocks selected from the margin trading and short selling pool from January 2012 to December 2018. The data are obtained from the CSMAR database and cross-validated using the WIND database.
The empirical results show that days-to-cover on the margin trading side has significant ability to predict the stock return, while the financing ratio (LR) does not have significant predictive power. This indicates that the days-to-cover is a better criterion than the LR, and can much more precisely represent the view of undervaluation, which is consistent with the theoretical model without financing restrictions. On the short selling side, however, the days-to-cover has no significant ability to predict stock returns. The short selling ratio (SR) has a significant ability to predict stock returns, which indicates that the SR represents the arbitrageur's view of overvaluation better than the days-to-cover. This is also consistent with our model under short selling restrictions. The results remain robust when they are tested with sub-samples in different periods, after controlling for the institutional investor shareholding ratio and other indicators of margin trading and short selling.
|
|
Received: 17 December 2018
Published: 01 September 2020
|
|
|
|
|
| No related articles found! |
|
|
|
|
