The impact of short-selling constraints on the B-share discount in Chinese market
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1 The impact of short-selling constraints on the B-share discount in Chinese market Presented by Mo Zhang Department of Finance and Statistics Svenska handelshögskolan / Hanken School of Economics, 1. Key concept» Short-selling Step 1. Short-selling Stock XYZ is $50 at time t. Investor A expects that the price will decline. Investor A has no stock XYZ at time t. Investor A borrows 100 XYZ shares from broker and sells them immediately. Copyright Hanken 1
2 Step 2. Repurchasing The Stock Price down (stock goes to $40) Borrowed 100 shares of XYZ at $50 $5,000 Bought Back 100 shares of XYZ at $40 -$4,000 Profit $1,000 The Stock Price up (stock goes to $70) Borrowed 100 shares of XYZ at $50 $5,000 Bought Back 100 shares of XYZ at $70 -$7,000 Profit -$2,000» B-share discount A-shares denominated by Chinese Yuan. B-shares in foreign currency (US dollars in Shanghai and Hong Kong dollars in Shenzhen). Some companies have dual-listed stocks, but their B-shares trade at a large discount to their A-shares. Before 2001, A-share market was closed to foreign investors while the B-share market was open only to foreigners. From 2001, the B-share market opens to Chinese investors. From 2003, the selected foreign institutions are allowed to buy A-shares. Copyright Hanken 2
3 2. What do I study in this paper?» The role of Short selling Evil: Short sellers are notorious for dumping markets to benefit themselves. George Soros Hedge funds Angel: Short selling decreases the size of speculative bubble and stabalizes the market (Miller, 1977; Harrison & Kreps, 1978,Scheikman & Xiong, 2003).» Key event: The lift of short selling ban in Chinese A- share market (March 31, 2010).» Study target: B-share discount in Chinese market» Study question How does this policy shift affect the B-share discount in Chinese market? Copyright Hanken 3
4 3. Why this study is interesting?» A rare natural experiment The lift of short selling ban in Chinese A-share market.» Controlling fundamental value in a stock price. A-B share structure.» Detailed daily data of short selling trading activities. Not public available in US market.» Amplify the literature of short selling constraints in emerging market. Immature investors Undeveloped market 4. How do I study the problem?» H1: The B-share discounts of pilot stocks decrease following the lift of short selling ban.» Event study The change of B-share discount before and after the ban lift. Pre-event window [-22, -1] After-event window [0, 22] Copyright Hanken 4
5 » Control factors A-share turnover The past four-day average of A-share turnover A-share idiosyncratic volatility The past four-day average of A-share idiosyncratic volatility» Control factors Margin purchase turnover Covering trading turnover of margin purchase A-share turnover B-share turnover A-share idiosyncratic volatility Exchange rate of CNY against USD or HKD The difference of risk-free rates Copyright Hanken 5
6 » Data 30 of 84 dual-listed companies for which A-shares are allowed to do short selling and margin purchase.»the trading volume of Short selling, margin purchase and corresponding covering trading»stock price»the volume of all the tradings»the number of tradable stocks and non-tradable stocks»exchange rate of RMB/USD and RMB/HKD»One year deposit rate in Chinese market»three-month T-bill interest rate in US market» Time period Daily data from Jan 02, 2008 to Jan 30, What do I find?» Short-selling VS. Margin purchase Short-selling trading is on the low level in Chinese stock market. (0.62% in SHSE and 1.368% in SZSE averagely) The holding period of short-position is averagely one day. Margin purchase is much more active relative to shortselling. Copyright Hanken 6
7 » Event study The strict short-selling ban in A-share market is one of reasons caused the A-share overvaluation. However, it is still noticeable that even through some B-share discounts decrease, they do not disappear.» Are short-sellers more sophisticated? Coeffficient Sign -*** +*** Trend chaser Rational Arbitrager Copyright Hanken 7
8 » Can short-selling correct the B-share discount? Coefficient Sign -*** -* Lower mispricing 6.Conclusion B-share discounts decrease more rational and experienced contribute on market stabilization Copyright Hanken 8
9 Svenska handelshögskolan / Hanken School of Economics, hanken.fi Copyright Hanken 9
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