The Influence of Margin Trading and Short Selling on the Price Efficiency of China’s Stock Market—Based on Portfolio Perspective

Abstract

In this paper, we use the natural experiment, the “false vaccine event” happening in Changsheng Life Biotechnology Co., Ltd. in the biological vaccine industry, to study whether the margin trading and short selling restriction will have an impact on the stock pricing. We built four different hedge portfolios based on the nature of whether the 22 stocks in the biological vaccine industry could be shorted, and the simulation of portfolio returns was shown three months after the “false vaccine event”. The cumulative return of the portfolio reached a level of 10% - 20%. Furthermore, based on the adequacy of stock price information content and the timeliness of stock price response to information, this paper constructs an index to measure the pricing efficiency of individual stocks. Through regression analysis, we find that among 22 stocks in the biological vaccine industry, the pricing efficiency of stocks which are allowed to carry out margin trading and short selling business is significantly higher than that of which are not allowed to carry out margin trading and short selling business. Based on the difference of return characteristics and pricing efficiency index of hedge portfolio, this paper shows that margin trading and short selling system can help to correct the mispricing of individual stocks and improve the pricing efficiency of the market.