The Research On The Effect Of Margin Trade And Short Selling On The Stock Pricing Efficiency

In the past, Chinese capital market subject to lots of supervision, so the type and the tool of transaction was limited. There were little derivative financial instrument in the market. While in2010, the margin trading and short selling program started, which greatly improves the function of Chinese capital market. Along with the consecutive steps of deregulation, the capital market in China sets a good opportunity for doing research on the influence of system on stock pricing efficiency. At the same time, the topic concerned what effect of the mechanism of margin trade and short selling on the security market becomes fashionable.This thesis illustrated the mechanism of how margin trading and short selling system works on stock pricing, and did empirical study on two levels. Firstly, this thesis studied the influence of short-selling-deregulation on overvaluing. According to Miller’s hypothesis, the market without short sale mechanism tends to reflect positive expectation of investors, so the stock price tends to be overvalued. With event study, this thesis compared the extra return of stocks before and after the event of deregulation on short-selling. Secondly, this thesis studied the changing in price informativeness. Efficient market hypothesis judge the efficiency of the market by whether the security’s price reflects all the available information or not. All kinds of information affect volatility of security’s price, at the same time the functions-allocation of resources, price discovery, risk management, and improving the corporate governance-of capital market need to achieve through the pricing. Hence, the more information the stock price contains, the more efficient the security market becomes. This thesis establishes regression equation of the effect of the firm specific information on non-system risk. to research the changing in pricing efficiency. This part investigates whether the impact of the margin trade volume on non-systematic risk is significantly positive. Then use R2as the indicator of price informativeness. R2in different years reflect the changing tendency.Through the test of overvaluing, the results show that short selling really bring significant negative return to the underlying stock, which means the short selling program literally help to bring stock price to a reasonable level. Besides, with the development of margin trading and short selling, the price informativeness is increasing gradually. The stock price shows more firm specific information. The amount of margin trade and the volume of short-selling both have positive effect on stock’s non-system risk, and which help to increase the price informativeness.By the study on the effect of margin trade and short selling on capital market, this thesis can give some references to the future development of credit transaction, especially the effect of expanding the scope of credit trade on the volatility of the market.