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There are some statistical anomalies in the Chinese stock market, i.e.,positive return skewness, anti-leverage effect (positive returns induce highervolatility than negative returns); and reverse volatility asymmetry(contemporaneous return-volatility correlation is positive). In this paper, wefirst confirm the existence of these anomalies using daily firm-level stockreturn data on the raw returns, excess returns and normalized excess returns.We empirically show that the asymmetry response of investors to news is onecause of the statistical anomalies if short sales are constrained. Then in thecontext of slow adoption of security lending policy, we conduct panel analysisand empirically verify that the lifting of short sale constraints leads tosignificantly less skewness, less anti-leverage effect and less reversevolatility asymmetry. Positive skewness is a feature of lottery. Investors areencouraged to bet on the upside lottery like potentials in the Chinese marketswhere the stocks skew more to the upside when short sales are constrained.

Positive skewness, anti-leverage, reverse volatility asymmetry, and short sale constraints: Evidence from the Chinese markets