Short selling restrictions and index futures pricing: Evidence from China

Andrew Lepone, Jun Wen, Jin Boon Wong, Jin Young Yang

Research output: Contribution to journalArticleResearchpeer-review

Abstract

This study examines the impact of short-selling restrictions on futures mispricing (relative to various benchmarks) in the market for CSI 300 index futures. In mid-2015, Chinese regulators imposed a new short-selling restriction in an attempt to curb excessive stock market volatility. Results show that futures under-pricing occurs more frequently at the transaction cost levels, ranging from 0 to 1.5%, while futures over-pricing occurs less frequently at the transaction cost levels from 0 to 0.75% under the new short sale rule. The results support the hypothesis that short-selling restrictions impose costs to the arbitrage trading strategies by arbitrageurs who do not own the underlying assets in the presence of futures under-pricing (or over-pricing of the underlying assets), resulting in more persistent futures under-pricing.
LanguageEnglish
Pages179-187
Number of pages9
JournalInternational Review of Economics and Finance
Volume61
DOIs
Publication statusPublished - 2019

Fingerprint

Short selling
Underpricing
Futures pricing
China
Assets
Transaction costs
Pricing
Stock market volatility
Short sales
Costs
Trading strategies
Arbitrage
Mispricing
Benchmark

Keywords

  • Short-selling restrictions
  • CSI 300 futures
  • Index arbitrage

Cite this

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Short selling restrictions and index futures pricing : Evidence from China. / Lepone, Andrew; Wen, Jun; Wong, Jin Boon; Yang, Jin Young.

In: International Review of Economics and Finance, Vol. 61, 2019, p. 179-187.

Research output: Contribution to journalArticleResearchpeer-review

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