Research On Short Sales Mechanism In Chinese Securities Market

After more than 20 years' high-speed development in China's securities market, products, scale of investment and investor's structure have expanded, and market supervision mechanism have gradually increased. But there exists great market volatility which is prone to rise and drop suddenly and sharply. Through the comparison with foreign mature markets, the lack of short selling mechanism is one of the important reasons for market volatility in China. The "underground" activities of long sales in China have existed for many years, but there is lack of the mechanism of short sales. On the basis of theoretical, practical and empirical analysis, this article studies the short sale mechanism from the following three aspects: the influence of short sales on market performance, the relationship between short selling restrictions and market interests' distribution and how to establish the short selling mechanism in China. The purpose of the research is to offer a theoretical and practical foundation for launching short sales and margin purchase in China.This paper first illustrates the principles of short selling mechanism, and then comparatively analyzed the history of credit transaction of the United States, Japan and Taiwan. At present, most countries or regions in the world have mechanism of short selling, but many countries or regions have restrictions on short sale in varying degrees, and those countries whose market manchanism is more perfect have fewer restrictions.In the study of the impact of short selling mechanism on information efficiency, this paper intends to combine Easley et al. (1996)'s model with Diamond and Verrecchia (1987)'s model. Through establishing the PIN model under short-sales constraints, studying the influences of short-selling restrictions on the PIN, and the impact of short sales on market information efficiency, the author finds that informed traders decide to sell short whether or not according to the cost of short sales. If the cost is small, informed traders will decide to sell short and be able to release bad news; if the restrictions are strict, informed traders will not sell short, and then hide the bad news. Suppose the distribution of the information is unchanged, short selling will promote the market price to reveal information of the informed traders, and the short-selling mechanisms will help to improve information efficiency.In this paper, the impact of the mechanism of short selling on market volatility and liquidity is studied from theoretical and empirical aspects. Through the theoretical analysis, we can see that short selling mechanism will increase liquidity and play a role in stabilizing the market, but at the same time there are some risks. In empirical research, first of all, the unit root test and Granger causality test are used to study the relationship between the margin purchase, short sales, market volatility and liquidity. The results show that it is not very significance in the aspect of short selling to improve market liquidity because of many regulation measures in Taiwan. The margin purchase and short sales are all not the Granger causes to market volatility. Secondly, the margin ratio of short sales in the Taiwan stock market is on behalf of the level of short selling restrictions, and Wilcoxon and Kruskal-Wallis non-parametric test methods are used to study the impact of margin ratio on the volatility and liquidity. It turns out that the relaxation of restrictions on short selling will not enlarge the fluctuation, and in some cases it will lead to less volatility. The changes of short-sale constraints have no significantly influence on liquidity. Finally, under the circumstances of international financial crisis, this paper studies the impact of "short-selling ban" on the market and finds that the implementation of strict control measures significantly increase volatility. These measures only play a role to alleviate panic of investors in the financial crisis.In studying the relationship between short sales and the interest distribution, the improved BB rule is used to determine the stock market cycle, and evaluate the skewness of the bull and bear market. It shows that the return distribution of Shanghai and the Hong Kong stock market all have positively skewed and negatively skewed results whether in bull market or bear market. Through the use of rolling windows techniques on the dynamic changes of skewness, the author finds that the Shanghai market is positively skewed in short-term, negatively skewed in long-term and the convertin is sharp. The Hong Kong market is negatively skewed in short-term and long-term, but the extent of negativeness is not so much. Then the EGARCH model is used to test the asymmetry of volatility in the two markets. The empirical results show that whether in Shanghai or Hongkong, bad news has greater impact on market activities than good news in the bear market. But in the bull market, there is "leverage" effect in Hongkong and there is "anti-leverage" effect in Shanghai. The differences arise mainly because of lack of short-selling mechanism in the Shanghai securities market, affecting the absorbing of price to bad news.Based on the studies of former chapters and other scholars, short sales mechanism is necessary to be established in China considering the present condition of the law system, the market environment, investors' structure and technology. By comparing the credit model of the U.S., Japan and Taiwan, China can follow the credit model of Japan. Because there are some risks in short selling transactions, we need to increase the disclosure of information; use monitoring tools freely, perfect the law system, reform the supervisory system and further improve the regulatory framework.