Costly and Unprofitable Speculation: Evidence from Trend-Chasing Chinese Short-Sellers and Margin-Traders

Costs and benefits of financial regulation: Short-selling bans and transaction taxes

“…Lower volatility under the short-selling ban is in line with the empirical findings of Chang et al (2007) and the increase in stock price with those in Chang, Cheng, Pinegar & Yu (2012). Both observations are confirmed by Chang, Luo & Ren (2012) who use a unique data set of Chinese stocks for which short-selling constraints were removed in 2010. In our model a short-selling ban increases the equilibrium price level by 7%, but a full leverage ban increases it by only 5%, despite lower volatility in this scenario.…”

“…Inferior price discovery in the tax scenario is due in part to higher transaction costs which generate larger hysteresis in the traders' response to information, as predicted by Constantinides (1986). The positive effect of the short-selling ban on price discovery is consistent with the empirical findings in Chang, Cheng, Pinegar & Yu (2012) and Chang, Luo & Ren (2012) but at odds with Bris et al (2007).…”

“…Other empirical papers find that short-selling bans reduce volatility (Chang, Cheng & Yu 2007) and increase stock prices (Chang, Cheng, Pinegar & Yu 2012). Both observations are confirmed by Chang, Luo & Ren (2012) who use a unique data set of Chinese stocks for which short-selling constraints were removed in 2010.…”

Costs and Benefits of Speculation

“…Inferior price discovery in the tax scenario is due in part to higher transaction costs which generate larger hysteresis in the traders' response to information, as predicted by Constantinides (1986). Superior price discovery under the short-sale ban is at odds with the empirical findings of Bris et al (2007), but consistent with Chang, Cheng & Yu (2012) and Chang, Luo & Ren (2012). Their data source is similar to ours in the sense that it comes close to being a controlled experiment.…”

“…Other empirical papers find that short-sale bans reduce volatility (Chang, Cheng & Yu 2007) and increase stock prices (Chang, Cheng & Yu 2012). Both observations are confirmed by Chang, Luo & Ren (2012) who use a unique data set of Chinese stocks for which short-selling constraints were removed in 2010. They also find that a ban entails better price discovery with respect to positive news.…”