Research On Short-sale Impact On Market Volatility And Inherent Mechanism

Short-sale impact on market volatility is an ongoing debate in academics and practitioners. Many scholars come to diametrically opposite conclusions on this issue. In order to acquire an objective and comprehensive understanding of this proposition, it is necessary to find out the inherent mechanism.This paper, on one hand, investigates the the impact of short-sale on market volatility, on the other, analyzes short-sellers’ behavior based on the theory of fundament and trend investment, revealing the inherent mechanism of short-sale impact on market volatility. Both of empirical analysis and computational experiment methods are applying, and the conclusions are confirmed with each other.On the aspect of empirical analysis, based on Chinese stock market, this paper, in the first place, investigates the impact of short-sale on market volatility. The result shows that market volatility increases after introducing short-sale. Short-sale volume and market volatility are positively related; furthermore, by decomposing short-sale volume into information component and non-information component, it shows that not only short-sale of information increases market volatility, but also short-sale of non-information increases market volatility.Furthermore, this paper analyzes short-sellers’ behavior from the perspective of fundament and trend investment to uncover the inherent mechanism. By investigating the reaction of short-sale to past return and the relationship between short-sale and fundamental value, it reveals that short-sellers are trend investors who target stocks with price fell, rather than overpriced stocks. Meanwhile, the research based on three-factor model shows that short-sale will drive price down. These two aspects of conclusions reveal the inherent mechanism of that short-sale increases market volatility in Chinese stock market which is discussed in Chaper3, that trend investors short-sell stock whose price fell, and leads price to drop further, thus exacerbating market volatility. Furthermore, we indicates the causes of short-sellers’behavior are the high short-sale cost and investors immature, which makes short-sellers’holding period is short, and use trend strategy to obtain short-term gains. The research also shows that high capitalization, high price level, low turnover and declining market condition have contributions to trend short-sale; and short-sale can lead price to drop more in declining market.On the aspect of computational experiment, a computational experiment platform of artificial stock market consisting of fundamental investors and trend investors is constructed, which has short-sale mechanism. Taking advantage of controllability and repeatability of computational finance, this research analyzes the effects of fundamental short-sale and trend short-sale respectively by setting the raito of the two investor types. The study finds that fundamental short-sale can reduce maket volatility, while trend short-sale will increase market volatility. The analysis of short-sale orders shows that short-sale orders of fundmental investors are submitted when price is higher than the fundamental values, while short-sale orders of trend investors are submitted when price is felling. Thereby, it reveals the inherent mechanism of impact of different short-sale types on market volatility:fundamental investors short-sell the overpriced stocks which drives the price aroud its fundamental value, thus reducing market volatility; while trend investors short sell stocks with price fell which accelerates down the price, thus increasing market volatility.The paper, on one hand, takes a comprehensive insight on short-sale impact on market volatility and its inherent maechanism, on the other hand, the empirical research based on Chinese stock market reveals current status of short-sale in Chinese stock market, and provides the basis for the further development of short-sale.