With the background of China’s Margin Trading pilot, the paper studies the effect of short selling mechanism on investors’ positive feedback trading behavior. The research results show that positive feedback trading behavior exists in Chinese stock market, and the launching of the short selling mechanism inhibits effectively the positive feedback trading behavior. Investors can show their pessimism towards the stock price by going short selling, thus the stock price can return quickly to the basic value. At the same time, leverage effect consists in the stock market, namely that investors react more strongly to bad news than to good news. After the implement of margin trading and short selling mechanism, the risk hedging mechanism increases, and investors in the market generally tend to react rationally to good news and bad news.
On March 31, 2010, the A-share market launched the margin trading pilot, so that the credit transactions that were a basic trading mechanism in capital market formally introduced into China. This filled a long time vacancy that lacked of short selling mechanism in securities market. In mature capital market, short selling provides a means of self-correction for the stock price. It is conducive to the discovery of prices, to bring more market transactions and trading strategies. The investors have an opportunity to combine different debt repayment methods through the margin trading functions, and then derive a variety of trading methods and strategies to achieve different investment objectives.
However, after the stock market crash in June 2015, the Stock Exchanges revised the rules of margin trading, and monitored the abnormal trading account. According to the experts’ report, frequent short selling transactions would cause adverse effects when the stock market was down. Then, several securities companies announced the suspension of margin trading business. The securities markets around the world and regions often implement restricted items to limit the short selling transactions when there is a crash in case of a greater impact on the stock price. This paper attempts to carry out an empirical research to contrast the effect of the implementation of short selling on positive feedback trading behavior of investors before and after the implement of the short selling mechanism, hoping to get useful conclusions.
In the study of the mechanism of short sales, first of all, the domestic study mainly concentrated in the analysis of the effect on information disclosure, asset prices and market volatility. Few study revealed the effect of the implementation of margin trading on the behavior of investors. And this is the primary coverage of the paper.
Secondly, the prior domestic research mostly stayed in the theoretical analysis and the simulation stage. This paper divided the empirical data into two parts including before and after the introduction of the short selling mechanism. By constructing the positive feedback trading model test, the empirical results analyzed the effect of margin trading on the investor behavior.
The remainder of this paper proceeds as follows. Section 2 reviews the related literature and develops empirical hypothesis. Section 3 introduces the DSSW model and asymmetric TARCH model, and then describes the data and presents the main analyses of empirical results. Section 4 sets forth our conclusions.
As one of the important link in the chain of financial innovation, Short selling mechanism is generally considered an indispensable part of the stock market. Its appearance not only promotes liquidity of the stock exchange, but also provides a new mechanism for price discovery [
Another point of view, on the contrary, market traders need a certain amount of time to absorb new information, that is, the current market price need a certain amount of time to digest all the information and, therefore, does not reflect all information. So the positive feedback trading behavior may be rational [
Building on the above arguments and facts, this paper proposes the empirical hypothesis that margin trading and short selling mechanism implementation can effectively inhibit the investors’ positive feedback trading behavior, and the investors’ response to good news and bad news tends to be rational.
The paper obtains four lists of Index (SSE Composite Index, SHSE-SZSE 300 Index and SSE 180 Index) daily return rate as the research sample. The constituent stocks of SSE Composite index are all listed stocks, including A shares and B shares, reflecting the changing situation of listed stocks of the Shanghai Stock Exchange. SHSE- SZSE 300 Index selected 300 A-shares in the Shanghai and Shenzhen stock market as a sample compiled index constituent stocks, covering about 60% of the market capitalization of the Shanghai and Shenzhen stock market, reflecting the overall trend of the two markets. It is “blue chip” in many stock indexes and the concentration camp of many institutional investors’ positions. SSE 180 Index selected the most representative 180 stocks as sample stocks, to establish a reflection profile and operation of the Shanghai stock market. The paper used two sample periods which covered Jan1, 2009 to March 30, 2010 and March 31, 2010 to December 31, 2014 as the two contrast sample before and after the implementation of short selling transactions. And this paper made Rt = 100 (
Positive feedback trading strategy is chasing and buying the winners. That is, buying the stock when the trend of stock prices is up, and selling the stock when the trend of stock prices is down. The traders make their investment decisions according to the prior stock price.
Positive feedback trading behavior model is firstly proposed by Shiller (1984) [
In Equation (1),
In the market equilibrium conditions, it satisfies the following equation:
The synchronous reaction of stocks of stock index caused by related market factors will lead to serial correlation of stock index. For example, the price changes of large volume stock will reflect faster than low volume stocks. Assume that
In Equation (2), when ϕ1 is negative and statistically significant, it indicates the existence of positive feedback trading behavior. ϕ0 reflects the impact of market failure or other factors. If ϕ0 is positive and statistically significant, it means that the non-synchronous trading, market failure and other factors cause autocorrelation.
At the same time, due to the development of China’s stock market is not mature enough, stock price changes will often influenced significantly by policies. In order to reflect the difference of the good news and the bad news reaction of China’s stock market better, and illustrate the effects of the introduction of short selling mechanism on investors positive feedback trading behavior better, the paper cites the asymmetric TARCH proposed by Zakoian (1994) [
In Equation (3), the
The value of ω reflects the impact of good news and the value of ω + γ reflects the impact of bad news. After the implementation of short selling mechanism, all of the value of ω + γ decreases. This indicates that after the introduction of the short selling mechanism, the investors generally react more rationally to the emergence of bad news on the stock market, thus restrains the positive feedback trading behavior in the stock market.
By combining with the DSSW model and asymmetric TARCH model, this paper makes an empirical comparative analysis of the data before and after the implementation of the short selling mechanism in China. Through the theoretical deduction and empirical analysis, it can be concluded as following.
Items | Daily Return Rate | ||
---|---|---|---|
SSE Composite Index | SHSE-SZSE 300 Index | SSE 180 Index | |
Mean | 0.000620 | 0.000760 | 0.000724 |
Standard Deviation | 0.017892 | 0.019199 | 0.019266 |
Skewness | −0.417967 | −0.383340 | −0.352948 |
Kurtosis | 6.418799 | 5.771163 | 5.885088 |
J-B Statistics | 1253.665 | 836.7033 | 892.8622 |
p-Value | 0.000000 | 0.000000 | 0.000000 |
Items | SSE Composite Index | SHSE-SZSE 300 Index | SSE 180 Index | |||
---|---|---|---|---|---|---|
Group 1 | Group 2 | Group 1 | Group 2 | Group 1 | Group 2 | |
α | 0.002351 | 0.000304 | 0.002371 | 0.000215 | 0.002514 | 0.000171 |
(1.804762) | (0.522399) | (1.683619) | (0.304902) | (1.799939) | (0.243792) | |
θ | −2.791913 | −0.400187 | −2.010144 | −0.003922 | −2.349002 | 0.116467 |
(−1.197713) | (−0.202152) | (−0.890665) | (−0.001808) | (−1.059158) | (0.05504) | |
ϕ0 | 0.153788 | 0.007836 | 0.178638 | 0.004868 | 0.164331 | 0.010385 |
(2.059767)** | (0.186805) | (2.304188)** | (0.11247) | (2.157563)** | (0.240985) | |
ϕ1 | −208.1230 | 142.8628 | −190.8845 | 107.5139 | −190.0514 | 73.09347 |
(−2.240692)** | (2.103394)* | (−2.154074)** | (1.537544) | (−2.208615)** | (1.089568) | |
α0 | 0.00000341 | 0.00000283 | 0.0000018 | 0.00000399 | 0.0000035 | 0.0000042 |
(2.091966)** | (4.895807)*** | (2.18718)** | (4.600879)*** | (1.956839)* | (4.815853)*** | |
α1 | 0.072325 | 0.052258 | 0.011097 | 0.050736 | 0.066624 | 0.053207 |
(6.858148)*** | (7.895717)*** | (6.221614)*** | (6.913897)*** | (6.120176)*** | (7.386013)*** | |
β | 0.923433 | 0.93367 | 0.010971 | 0.933314 | 0.929195 | 0.9303 |
(90.70697)*** | (125.0082)*** | (84.39165)*** | (109.3732)*** | (85.87972)*** | (113.5822)*** |
*, **and *** denote the significance level of 10%, 5% and 1%.
Items | SSE Composite Index | SHSE-SZSE 300 Index | SSE 180 Index | |||
---|---|---|---|---|---|---|
Group 1 | Group 2 | Group 1 | Group 2 | Group 1 | Group 2 | |
ω0 | 0.083672 | 0.0000002 | 0.00000519 | 0.00000279 | 0.00000563 | 0.00000417 |
(2.739673)*** | (2.705461)** | (2.479394)*** | (4.80066)*** | (2.523195)** | (4.660592)*** | |
ω | 0.049443 | 0.05344 | 0.062871 | 0.054286 | 0.060544 | 0.047011 |
(2.920160)*** | (5.557459)*** | (4.098672)*** | (6.566535)*** | (4.192624)*** | (5.499854)*** | |
γ | 0.054877 | −0.008817 | 0.027241 | −0.0045 | 0.023512 | 0.008573 |
(2.804220)*** | (−1.017516) | (1.627104) | (−0.511141) | (1.460334) | (0.951414) | |
λ | 0.907604 | 0.940361 | 0.915255 | 0.934117 | 0.919213 | 0.932044 |
(65.78585)*** | −82.01937 | (82.4307)*** | (123.1511)*** | (77.87705)*** | (108.2906)*** | |
ω + γ | 0.10433 | 0.040635 | 0.090112 | 0.049786 | 0.084056 | 0.055584 |
*, **and *** denote the significance level of 10%, 5% and 1%.
First, the stock market exists positive feedback trading behavior, which supports the study of Li and Gu (2007) [
The results of the study showed that the implementation of the mechanism of short selling can restrain investors’ positive feedback strategies. This attributes to the role of risk hedge of short selling mechanism, which helps the price of stocks reflect the true value and strengthen the overall investor rational investment. The implementation of short selling mechanism inhibits the overall positive feedback trading behavior of stock market. According to the previous theoretical analysis, most investors in the stock market can express their own pessimism by short selling, which is one of the reasons of widely implementation of short selling mechanism.
At present, according to the situation of short selling mechanism in China, we can find that the amount of short selling is too small compared with the overseas capital market, and the number and the type of the targets are limited, which mean that the development of China’s short selling mechanism is not mature enough. At the same time, the access threshold of current short selling trading is too high for the most of medium and small investors. Above all, the beneficial impact of the short selling short mechanism on the stock market is still relatively limited. Based on the above analysis, this paper puts forward the following suggestions. First of all, securities policy makers should strengthen market supervision and improve the mechanism of information disclosure consciously when establish regulatory measures. Secondly, CSRC should improve the long-term construction of short selling mechanism and reform the bonus system which perfecting the profit model. Finally, all of investors should strengthen the awareness of risk of securities investment, especially the small and medium investors, and promote the rational investment.
Yaoqiong Peng, (2016) Research on the Impact of Short Selling Mechanism on Investors’ Positive Feedback Trading Behavior. Modern Economy,07,434-440. doi: 10.4236/me.2016.74048