An Empirical Research On The Influence Of Short-selling Mechanism On ETF Price Transmission And Market Quality

As one of the indispensable pricing means of the financial market,the short-selling mechanism is generally considered to be an important part of the developed financial market.China's A-share market has launched securities margin trading,stock index futures and options since 2010,to establish the short-selling mechanism,but the market is still inefficiency.The existing studies have focused on the changes in the market after establishing the short-selling mechanism.However,the short-selling mechanism is limited by the imbalance of securities margin trading,the lack of individual stock futures and options and so on in China's A-share market.Therefore,this paper makes an empirical research on the influence of short-selling mechanism on price transmission and market quality,to reveal the mechanism of short-selling mechanism in pricing and market operation.It not only provides a new idea to explore the effectiveness of short-selling mechanism,but also has important significance for China to develop the financial innovation.In this paper,we explore the influence of short-selling mechanism on the Exchange Traded Funds(ETF)price transmission and market quality,based on the Missing of short-selling mechanism in 2015,there was a huge fluctuation in China's financial market at that time.On one hand,we choose the SSE 50 Index,CSI 300 Index and CSI Smallcap 500 index,and ETFs that tracks those indexes to construct the Vector Error Correction model(VECM),Information Share and Common Factor model,which was based on five-minute high-frequency data,to explore the impact of the short-selling on ETF price transmission.On the other hand,taking the market liquidity,market volatility and tracking error as proxy of the comprehensive performance of the ETF market quality.The Dummy Variable Regression model and the Difference-in-differences(DID)model are constructed based on five-minute high-frequency data,to explore the relationship between short-selling mechanism and ETF market quality.We conclude that:(1)the short-selling mechanism significantly changes the price transmission relationship between ETF and stock market.When short-selling is allowed in the market,the price of staok index changes earlier than the ETF price,shows the price discovery function is dominated by the stock index,then to correct the ETF price.On the contrary,the disappearance of the short-selling mechanism leads to weaker the price discovery function of the stock index.So the ETF dominates price discovery due to its high liquidity and other better characteristics.It means the short-selling mechanism could promote the pricing function of financial infrastructure tools.And it also shows the short-selling mechanism has the greatest impact on the price transmission between the CSI Smallcap 500 index and the ETF tra cking on it.(2)The missing of the short-selling mechanism led to the deterioration of market quality,which manifested as a significant drop in liquidity,increased volatility,and an increase in tracking errors.With the short-selling being restricted tightly,the quality of the market has deteriorated significantly.The robustness test has also confirmed the above research conclusions.It shows that the short-selling mechanism significantly affects the ETF market quality.If the short-selling is not allowed in the market,it will result in the lack of liquidity,increased volatilit y,and distort the pricing.