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.
- Short-selling restrictions
- CSI 300 futures
- Index arbitrage
Lepone, A., Wen, J., Wong, J. B., & Yang, J. Y. (2019). Short selling restrictions and index futures pricing: Evidence from China. International Review of Economics and Finance, 61, 179-187. https://doi.org/10.1016/j.iref.2019.02.002