Margin Trading And Short Selling Constraints With Idiosyncratic Volatility Premium

Idiosyncratic volatility puzzle,that is,the negative relation between the idiosyncratic volatility and the stock expected return,has attracted the attention of many researchers in the fields of asset pricing.This paper examines the change of idiosyncratic volatility and idiosyncratic volatility premium in China stock market,especially during the period from January 2000 to December 2017,when the margin trading and short selling constraints are relaxed.Furthermore,we investigate the influence of margin trading and short selling constraints on stock prices and market efficiency.This paper extends the model of Miller(1977)by adding margin trading constraint,and finds the asymmetry influence of short selling and margin trading on idiosyncratic volatility premium.Investors have more uncertainty about the stocks with higher idiosyncratic volatility,so their opinion is more dispersed.With short selling constraints,the negative opinion about the stocks with higher idiosyncratic volatility is more likely to be depressed,so the stocks are overpriced and the premium is negative.While with margin trading constraints,the optimistic opinion about the stocks with higher idiosyncratic volatility is more likely to be depressed,so the stocks are overpriced and the premium is positive.This paper finds that after margin trading and short selling constraints are relaxed,idiosyncratic volatility decreases,which implies that the uncertainty about the stocks decreases.However,the negative idiosyncratic volatility premium in the China A-shares market does not change after margin trading and short selling constraints are relaxed.Furthermore,the premium of the stocks with high idiosyncratic volatility is more negative,when the margin trading volume is higher.This result indicated that there still exits high implicit costs of short selling,and the market efficiency is not improved after the margin trading and short selling constraints are relaxed.