Do short selling and margin buying stabilize the market? Evidence from China

ABSTRACT

By directly checking the correlation between short-selling (margin-buying) activities, we find that short sellers and margin buyers are beneficial for market stabilization in China, and such effects do not attenuate during the crazy bull-market. Furthermore, by quantile regression analysis, we show that such stabilizing effects are more significant in higher quantiles.

KEYWORDS:

• Short selling activities
• margin buying activities
• stock volatility
• market stabilization

JEL CLASSIFICATION:

• G12
• G11

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ For example, on the evening of 18 September 2008, when the UK’s Financial Services Authority (FSA) announced their decision on banning short sales of some financial stocks, Chairman of FSA argued that they have been much concerned at the market volatility.

² On 3 January 2005, Reg SHO becomes effective, which provides a new regulatory framework governing short-selling of securities in U.S. stock markets.

³ In the 1930s, several events restricted or even prohibited short selling, such as bans shorting on downticks, requires daily short interest reports, etc.

⁴ In September 2008, the SEC temporarily banned most short sales in nearly 1,000 financial stocks.

⁵ For example, some papers show that short selling activities are predictive for future return (Figlewski 1981; Asquith, Pathak, and Ritter 2005; Boehmer et al, 2008), other papers document that short sellers can take advantage of specific corporate news events (Karpoff and Lou 2010; Christophe, Ferri, and Hsieh 2010; Engelberg, Reed, and Ringgenberg 2012). Li et al. (2018) also show that margin traders in Chinese market are more informed.

⁶ Essentially, this treatment is similar to Li and Wang (2010) who use the proportion of institutional investors as a proxy for informed traders.

⁷ We have also implemented DID analysis to investigate the overall effects of short selling and margin buying programme, and the results are consistent with the argument reported in this paper. The full results are obtainable from the authors upon request.

⁸ Such treatment is common in realized-volatility related literatures, such as Corsi (2009).

⁹ During the nine months, the SSE Composite Index rise from 2235 to 5178 (another peak since January 2008).

Additional information

Funding

This work was supported by the National Natural Science Foundation of China [grant number 71320107002].