Short-Sale Constraints And Price Efficiency Of Capital Market

In order to maintain the stability of the market and promoting the development of securities market in China, on March31,2010, China launched the margin trading. Nowadays, margin trading of China has nearly three years history, the underlying securities has been increased from the original90stocks to the current500stocks; scale of margin trading also has developed by leaps and bounds, turnover of margin purchase has been increased from less than10million yuan to10billion yuan; volume of short sale has been increased from less than10thousand to400million shares. The establishment of the margin trading is a breakthrough development of securities market in China, it marks the end of the Chinese "unilateral stock market", marks Chinese stock market developed to short-sale era. So, how does the margin trading impact on Chinese securities market? Can the margin trading improve the pricing efficiency of Chinese stock market?We can research the price efficiency of securities market from price discovery and information efficiency. Price discovery is in abnormal returns; information efficiency is in speed of price adjustment. We takes the underlying securities and other securities before and after introducing the margin trading as the research object, in order to examine the impact of margin trade on the price efficiency of Chinese securities markets. This paper is divided into six parts, each part of the contents are arranged as following:The first section, we introduce the background and the frame of this paper. In the second section, we introduce the meaning of margin trade, the history of margin trade in America, Taiwan, Hong Kong, and the development of margin trade in China. The third section, we summarize the related paper of margin trade and price efficiency of securities markets. In the fourth section, we introduce our data and empirical methodology. The fifth section is our empirical research and our findings. In the last section, we conclude with a discussion of some of the implications of our study and some ideas for further work in this area.According to the empirical results, our conclusion is as follows:1. The study of margin trade and abnormal returns shows that the introduction of margin trading is indeed enhance the price discovery function of China’s security markets, improve the pricing efficiency of stock market in China. We use the event study method, and select the introduction day of margin trade (March31,2010) and turn-to-conventional-trading day (October28,2011), use the abnormal return and compounded abnormal return of underlying stock and other stock as research objects. We find that the introduction of margin trading is indeed enhance the price discovery function of China’s security markets, improve the pricing efficiency of stock market in China.2. The study of margin trade and speed of price adjustment to private information shows that the introduction of margin trading will improve the information efficiency of stock market, speed up the price adjustment to private new information, including private bad news. We use the lag indicator of price adjustment introduced by Hou and Moskowitz (2005), and Phillips (2011) to measure the speed of price adjustment to private information. We find that short-sale constraints did hinder the price adjustment to private information before the introduction of margin trading; the introduction of margin trading means relaxation the constraints on short selling, really improve the information efficiency of Chinese securities market, the speed of price adjustment to private information and negative private information is indeed speeded up.The innovation of this paper lies in the use of lag indicator introduced by Hou and Moskowitz (2005) as the measure of speed of price adjustment. Due to the difficult to measure speed of price adjustment to new information, most of studies focus on short-sale constraints and securities pricing, liquidity and volatility, only a few studies research short-sale constraints and speed of price adjustment to new information. Furthermore, because China introduces the margin trade only for three years, there is still no studies to research relationship of margin trade and speed of price adjustment to information.Following the development of margin trade, future research can use weekly data to study the relationship of margin trade and seed of price adjustment to information. Because the daily data are affected by microstructure of stock market, such as nonsynchronous trading, sales rebound, etc. Besides, due to difficult to find a direct measure of price adjustment to new information, we use lag indicator introduced by Hou and Moskowitz (2005) as the indirect measure of speed of price adjustment. Subsequent empirical research should find the direct measure of price adjustment to new information to conclusion of improve the empirical research.