Stock Market Short Selling Mechanism

On Oct. 5th 2008, person responsible for China' s Securities Regulatory Commission has announced that the pilot project on short selling and margin financing will be launched recently, which indicates that the time of adopting the short selling mechanism is becoming closer. This paper studied the influences of shorting mechanism on China stock market from both theoretical and practical aspects, gave some related policy suggestions which could provide some reference for the supervisors.The three main functions of the short sale mechanism—increasing market efficiency, decreasing market fluctuation and improving market liquidity—are the main topics of and also the main thread across this paper. This paper can be divided into five parts which are listed below.The introduction part briefly introduced the meaning of this study, the subjects and methodology of the research, the anticipated results and possible innovations. It is a summary of the overall pathway of this study. Besides, this part also gave the definition of short selling, briefed the history and current situation of carrying out this mechanism, which provides the background of the following research.The first chapter is a Literature Review, which has been divided into three topics according to the three functions of short selling. This part summarized the past work and results in this area by both local and foreign scholars, which is good reference for the methodology and theory of this paper.The second chapter is a theoretical analysis of short selling. This part stands on the basic theory and logic of Economics and Finance, analyzed the different market behaviors between stock markets with short selling mechanism present or absent. This part explained why the three main functions exist and how they are realized on the stock market. The third part is an empirical study on short selling. Hong Kong Stock Market and China' s A-share Market are selected as the study subjects. By comparing the market performances before and after the introduction of short selling in Hong Kong stock market, we derived that short sale mechanism can alleviate market fluctuation. And by comparing the relative changes between shortable and nonshortable AH premium indices of A+H shares panel, we derived that short selling has the ability to improve market efficiency.The fourth part is about policy suggestions. It provides some practical suggestions for decision makers in three aspects: the necessity of introducing short selling, the timing to start the mechanism, and some specific good rules we should learn from experiences.This paper intended to have some innovations on the methodology of doing empirical research. Specifically, one innovation is to choose a new study subject. This paper selected a unique panel-China' s A+H shares as the subject which has never been selected in short selling research before. The other innovation is a new method to eliminate the systematical difference of different markets. This paper studied two AH premium indices which are relative parameters. By studying the changes in a relative fraction, we can ignore the systematical differences.