Short Restrictions On China’s Stock Market Herding

Having come across boom-and-busts, China’s capital market gets more and more efficient and effective, after margin trading and stock index futures started. However, the introduction of short-selling mechanism couldn’t stop the history of surges from repeating itself in 2015. What roles do the irrational behaviors of investors play in the anomalies? Are the irrational decisions completely spontaneous, or partly induced by the defects of trading mechanism?At present, there are plenty of researches on irrational fluctuation and inefficiency of market. Some explain them with short-sales constraints, which will increases the probability of the market crash under investors’ heterogeneous believes. While, others attribute them to herding behavior of investors. In fact, as common knowledge, the restriction on short-sales should have affected investors’behaviors. Yet present articles ignored this mechanism.This essay will establish a representative investor model, including private information investors, herding investors and noise traders. It compares the level of herding behaviors with and without short-sales constraints, finding out that there would be stronger herding in a rising market than in a falling one. Another finding is that short-selling restriction and significant systematic rick will enhance herding.In empirical study, this article describes the dynamic of herding behaviors in China’s A-share market from 2007 to 2015, with CCK method. The results of differential equation regression discontinuity on natural experiment data produced by the gradually expanding of the margin target range, indicate that investors show a stronger herding on margin targets. Study on CSAD and trading volume of margin implies that this phenomena may be caused by leverage, which enlarges the systemic risk taken by investors. It also tells that stock index futures and the marginal shorts on ETFs can weaken herding, because of their function of hedging systematic risk.