Does short selling improve stock price efficiency and liquidity? Evidence from a natural experiment in China
Document Type
Article
Date of Original Version
10-13-2018
Abstract
China introduced short selling for designated stocks in March 2010. Using this important policy change as a natural experiment, we examine the effect of short selling on stock price efficiency and liquidity. We show that the introduction of short selling significantly improves price efficiency, as measured by the differences in individual stock responses to market returns and the delay in price adjustments. Short selling also enhances stock liquidity, as measured by bid-ask spread and Amihud [2002. ‘Illiquidity and Stock Returns: Cross-section and Time-series Effects.’ Journal of Financial Markets 5: 31–56] illiquidity measure; and reduces stock volatility. Overall, our results suggest that short selling helps to stabilize asset prices, provides additional liquidity and improves market quality, even in an emerging economy with a less developed stock market than that in the US and Europe.
Publication Title, e.g., Journal
European Journal of Finance
Volume
24
Issue
15
Citation/Publisher Attribution
Li, Zhisheng, Bingxuan Lin, Ting Zhang, and Chen Chen. "Does short selling improve stock price efficiency and liquidity? Evidence from a natural experiment in China." European Journal of Finance 24, 15 (2018): 1350-1368. doi: 10.1080/1351847X.2017.1307772.